Frequently Asked Question
Prepare cash flow forecast FAQS
- What is a cashflow forecast?
- What can you use it for?
- How to prepare a cash flow forecast?
- How do I configure Cashflow Plan to handle a service or distribution business?
- What is a cash flow projection?
- How will different finance choices affect my profitability or cash flow?
- Will external finance increase my risks?
- What changes does Cashflow Plan make to Excel and Windows?
- Why must I have a cashflow forecast?
- What are the Advantages of Managing Cash Flow?
1. What is a cashflow forecast?
A cash flow forecast designates the likely future movement of cash in and out of the business. It's an approximation of the amount of money you expect to flow in (receipts) and out (payments) of your business and comprises all your projected income and expenses. A forecast typically covers the next 12 months, still it can also cover a short-term period such as a week or month. The concept of cash flow is rather easy.
2. What can you use it for?
Cash flow forecasts can assistance predict upcoming cash surpluses or shortages and support you to make the right decisions. It can help in tax preparation, planning new equipment purchases or identifying if you require to secure a small business loan.
Through including every case situation in your cash flow forecast you will see in what way your business will cope if your business hits tough times or does better than predictable. Previous warning allows you to work out solutions to expected temporary cash shortfalls or arrange short-term investments for temporary cash flow excesses.
3. How to prepare a cash flow forecast?
STEP 1: Add cash inflows you expect to collect during the period as well as customer payments, interest earnings, dividends, sponsorship, grants and so on. Your cash inflows will trust on the technique of payment your clienteles use – cash or credit. Enter the expected cash sales immediately and the credit sales when your clienteles are likely to pay you. Your credit sales income will depend on your credit management policy.
STEP 2: Add cash outflows from the items listed in your expenses forecast including supplier payments, salaries, loan repayments, credit card payments, and taxes. Consider regular, irregular, and seasonal payments such as rent, repairs and maintenance as required, and inventory purchases.
STEP 3: Simply add in an opening bank account balance, and add the revenue less the expenses for every weekly or monthly period to find out your likely cash position.
4. How do I configure Cashflow Plan to handle a service or distribution business?
There is no requirement to configure anything. As supplied, Cashflow Plan can accommodate a manufacturing, service or distribution business. To handle the latter, you simply ignore (i.e. set values to zero or empty after clearing assumption reports) the supposition variables which are irrelevant to your business type (e.g. finished inventory).
5. What is a cash flow projection?
A cash flow projection is a forecast of cash inflow to and outflow from your business, which tells you when and by how much your available cash will rise and fall. Towards produce a cash flow projection you must forecast sales and expenditures and recognize the dates of revenue collections and payments. NB A cash flow projection is not the same as a profitability forecast, which provides an accounting measure of profitability.
6. How will different finance choices affect my profitability or cash flow?
With equity financing, there are no interest payments so there is no impact on profitability or cash flow. Still, your investors might require distribution of profits in the form of dividend payments after a certain period of time. They might also have an exit strategy that needs you to buy them out in the future. Both situations can affect your cash flow suggestively.
7. Will external finance increase my risks?
Yes. With loan financing, you will require to make interest payments and repayments of the capital. If your business doesn't meet these responsibilities, there is a risk that the bank might foreclose on you. With equity financing the providers share the risk and rewards but they might remove or limit you if the business does not perform sufficiently.
8. What changes does Cashflow Plan make to Excel and Windows?
Once installed, Cashflow Plan generates an install log and sets up a facility for uninstalling Cashflow Plan (using Control Panel | Add/Remove Programs). When Cashflow Plan runs within Excel, it makes some slight changes to the operation of Excel. These contain hiding row/column headers, setting the calculation technique to manual, and showing only the standard toolbar along with Cashflow Plan's own toolbar. Maximum changes are removed automatically when a Cashflow Plan file is closed and the balances disappear once Excel is re-started.
9. Why must I have a cashflow forecast?
Numerous organizations struggle because of insufficient control over cash flows. Insight into what income will be received, and when, means that the organization will be able to plan to meet future expenses efficiently. Good cash management is necessary for business planning and budgeting, and is a fundamental aspect of good governance and best practice financial management.
10. What are the Advantages of Managing Cash Flow?
The Advantages of Managing Cash Flow
Understanding cash flow is the key to running a successful small business. Good cash flow management will help make sure your business runs smoothly and it gives you the insight to keep on top of your firms financial health. Having a clear understanding of where your firm’s working capital is tied up (e.g. invoices, stock etc), when it is likely to come in, and what cash commitments are coming up is extremely beneficial to know in advance. Preparing a cash flow forecast will help you to:
- Recognize potential cash flow shortages and take action to reduce its impact (e.g. negotiating new terms with suppliers, additional borrowing or chase overdue invoices)
- Plan ahead, make investments without being concerned that existing commitments will not be met (e.g. pay wages)
- Decrease dependence on your Bank and save interest charges by paying down debt when you have surplus cash
- Recognize surplus cash which can be invested to earn interest
- Demonstrate to your Banker, investors, customers and suppliers that your business has a healthy cash flow even in these times of liquidity crush.