Starting a cash flow forecast

In a previous blog, we explained that a cash flow forecast is a financial road map and highlighted the importance of understanding where your cash comes from, and where your cash goes. Many good businesses can be profitable, but may still run out of money if they, for instance, buy big pieces of plant and equipment or have large loan repayments.

So we know the WHY of preparing a forecast. The next step is HOW to prepare a forecast. And what’s the difference between a cashflow forecast and a budget?

A budget focuses mainly on income and expenses in your Profit and Loss Account. A cash flow forecast records all money coming in and going out of your business bank accounts. It includes items you won’t find in your profit and loss account, such as buying assets, taking out or repaying a loan, or paying taxes.

A great piece of advice I was given when writing a report is to just start typing whatever comes into your head. It may end up being the beginning, middle, or end of your document, but that’s OK – you can rearrange things later. Having something in writing will give you ideas, prompt you to go off in different tangents, and you won’t be discouraged by a blank page.

Let’s go!

Profit and loss account
Balance sheet
Tax stuff
Cash summary
What does your cash flow forecast show you?

Profit and loss account

The first step is to can 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.
  • Think about the timing of expenses
    • Memberships may be once a year
    • ACC levies are usually due in July/August
    • Rates are paid four times a year
    • Your power bill is likely to be higher in winter
    • Large planned maintenance costs should be included
    • When will you sell purchased goods – the next month, the next season…?
    • Do you pay less wages during the Christmas period?
  • 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.

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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

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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.
  • If you know the amount of your provisional or terminal tax payments, add them in
    • You can even estimate this, based on the figures in your Profit and Loss Account above

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.

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Cash summary

The final step is to include separate rows for:

  1. The (expected) bank balance at the beginning of the forecast period – Aug 2020 in the snip below
    • For the first month, you’ll need to type in the opening balance
    • For each of the following months, your opening balance will be the same as the closing balance from the previous month, so add a formula in your spreadsheet to cover that
      Note how the opening balance for Sep 2020 is the same as the closing balance of Aug 2020 ($1,248.57)
  2. 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
    • $1,403.75
  3. 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
    • ($1,248.57)

Your cash flow forecast should look something like this:

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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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