7 Steps to Easy Cash Flow Forecasting

Be honest with yourself. How many times have you intended to complete a cash flow forecast or a budget for your business and found a way to procrastinate? How often do you tackle something easier and put off forecasting to another day because it’s no longer a priority?

The idea of creating a 12-month cash flow forecast from scratch can seem like an overwhelming task. If you are anything like me, there is often a big gap between intent and action.  When faced with a task like cash flow forecasting or budgeting it’s hard to know where to start.

I am going to give you a recipe to create a very good cash flow forecast in 6 easy steps.

The principal underpinning this recipe is the process of working from the greatest certainty to the greatest uncertainty. For example, there is usually a great deal of certainty around the amount and the timing of your rent but there is a high level of uncertainty in your sales income in six months. Using this method means you will be completing your forecast or budget from the bottom to the top.

1. Fixed capital payments

The easiest place to start is with fixed capital payments. These are financial payments you have committed to make to a financier or supplier for a previously agreed amount at a previously agreed time, like loan repayments. They could also be capital purchases you have agreed to make at a future time, such as purchasing a new piece of large equipment four months from now.

2. Fixed overheads

Next, fill in all of your fixed overheads. I call these your standing still costs. These are the costs your business will incur even if you do not buy or sell product or services for 12 months. Good examples of these costs are:

  • Rent
  • Accounting fees
  • Electricity
  • Interest on loans
  • Rates
  • Insurance

These costs tend to be fairly stable over time, so you can usually import these costs from the last 12 months’ actuals in your accounting system and adjust up or down, as required.

3. Attributable overheads

The next step is filling in all of your attributable overheads.  Attributable overheads are not a classification you find in any profit and loss report – this is a category made up by me.  They are costs that are not variable costs or cost of goods sold (COGS), but they are not entirely fixed, either.  These are overheads attributed to a particular function, product, service or strategy within your business.  If you stopped providing this product or service they would not be incurred. Good examples include wages and staff training.  These overheads are very important to consider if you are making changes to your business like expansion or changing the products or services you offer. You will find it is sometimes hard to decide if an expense is a fixed or attributable overhead.  Don’t stress too much about it.  It’s a way of evaluating your expenses, especially changes.

4. Capital receipts

Before you complete the remainder of your expenses, jump close to the top of your cash flow forecast and fill in your capital receipts. This is income you are going to receive from the sale of capital.  If you are planning on selling a piece of equipment in seven months you would enter it at this stage.

5. Forecast income

Now we jump to the top of your cash flow forecast.  This is the most difficult part because it has the greatest amount of uncertainty.  In most cases the numbers are aspirational targets or goals. You cannot budget on them with certainty. This is where I recommend you spend some extra time.

If you have been trading for more than 12 months, a good place to start is with your income from last year. For every month, ask yourself if you expect this figure to remain stable, increase or decrease. You need to ground truth in these assumptions against your business plan and the economic climate your business is operating in. There is no magic method with forecasting, and hope is not a strategy.  It is also important to remember that all of these figures are just a starting point and will need to be adjusted constantly as you move down the cone of uncertainty.

6. Variable Costs (COGS)

The reason the variable costs (COGS) have been left to the last is because they are costs that will only be incurred with the supply of goods or services. You need to have completed your income forecast including the volume of goods or service sold.  Before you can forecast the volume of product or service, you will need to buy or fund your COGS. For example, if you plan to sell 200 widgets at $1000 each in July, you will need to budget to buy at least 200 widgets at $600 each in May.

7. Timing

It is very important to remember the most important element to any cash flow forecast is timing. It is not the date you actually buy or sell a product or service that matters. It’s the date the cash enters or leaves your bank account. It is important to adjust all of the figures in your cash flow forecast so they reflect the actual time the cash enters and leaves your account.

Using the example above, if you sold 200 widgets in July on a 30-day account, the money would not enter your account until August.  If you purchased those same widgets as stock in May on a 30-day account, the cash would not leave your account until June.

You now have a comprehensive cash flow forecast for your business.  The next step is to look at your bottom line (net cash flow) and review the peaks and troughs in your cash flow over the year and adjust forecast income and expenses to suit your working capital restrictions.

If you’d like to find more ways to simplify your budgeting and forecasting, why not take a look at Reep? You might be surprised at how easy it is to run your business when you have good tools doing the work for you.