FINANCIAL LITERACY • 2 NOVEMBER 2021 • 3 MIN READ

Starting a cash flow forecast

SECTIONS

Profit and loss account

Balance sheet

Tax stuff

Cash summary

What does your closing cash balance show you?

In a previous blog, we explained the WHAT and WHY of preparing a cash flow forecast. The next step is HOW to prepare a forecast.

Profit and loss account

The first step is to run a Profit and Loss report in Xero on a monthly basis and get it to show comparatives for previous months. To do this, just follow these instructions, and then export the report to Excel. There – you have something in writing and a good starting point!

Next, critically review the income and expenses on a line-by-line basis and adjust each month up or down where needed. Don’t sweat the small stuff though!

Your income may increase or decrease during holiday periods, or with the change in seasons
Some expenses may fluctuate depending on the number of sales (for example, purchases and commissions)
Think about the timing of expenses
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You may be considering extending your product range – how much additional revenue do you expect? How would your costs change?
Maybe you’d like an additional employee – will this employee generate more business income, or perhaps take over some of your tasks to free you up? Remember – business improvement isn’t just about making money. Having downtime to enjoy your success is just as important

Balance sheet

Next, we add costs from outside of the Profit and Loss Account, month by month.

Will you purchase assets, and when?
Do you plan to sell an asset?
Will you obtain a loan?
Factor in any fixed loan or finance payments
If you withdraw regular amounts from the business as living expense, include these as well

Tax stuff

Want to get even more tricky?

Add your expected GST payments to each relevant month – include a formula which roughly calculates this from the information you’ve already entered
Add your expected PAYG Instalments each quarter

Please don’t be concerned if this is a little too technical for you. Remember – you just want to start the cash flow forecast. Tweaking it can come later.

Cash summary

The final step is to include separate rows for:

The (expected) bank balance at the beginning of the forecast period – Aug 2020 in the snip below
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The net cash movement for the month – this will be your income plus any money received from loans or sale of assets, minus expenses, minus payments for assets, taxes and loans
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The next row should have a formula, adding 1 and 2 together – this gives you your closing bank balance at the end of the month
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Your cash flow forecast should look something like this:

What does your closing cash balance show you?

Now – if your formulas are working correctly, any change to any figures in any month will flow through to your forecasted closing cash balance.

The monthly closing cash balances may indicate you need additional money- will you go into overdraft (with high interest rates) or find another funding source?
Is there a build up of cash? What could you do with it – upgrade assets, wage increases, pay off debt, put aside for tax or savings?
What would happen if you brought forward, or pushed back, the date you purchase an asset?

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