Management accounts: How cash flow forecasts help you plan

Every business needs enough cash to function

Sounds obvious, but you would be amazed at the number of businesses we see that really have very little idea if they will have enough cash or not. The answer to this is to have and to update a cash flow forecast as part of how you control and manage your business.

A cash flow forecast is a useful tool to predict how much money you will have in your business each month.

Without one, it is very difficult to plan for what cash the business may need or may generate over the short to medium term. We assist many of our clients with creating and maintaining cash flow models, without which they would struggle to manage their cash needs.

So how does it work?

A forecast looks at the inflow and outflow of money into your business over the coming months, and allows you to recognise where the business will have a surplus or a deficit of cash. It goes without saying that we all hope to have more coming in than going out – but only through running a cash flow forecast will you have the definitive answer!

An accurate cash flow forecast is not difficult to achieve, so long as you follow a few simple principles. Remember that it is a prediction of what you think is going to happen in the future, so the more accurate the information and predictions you can feed into the cash flow, the more accurate your cash flow model will end up being.

Sales forecasts

Some businesses have a defined pattern of sales throughout the year, so it is straightforward to estimate what your sales figures are likely to be, not forgetting to factor in an element of sales growth or shrinkage for what you think will happen over the next 6-12 months.

If your business does not have a defined sales pattern, this makes it much harder to forecast what your revenues are likely to be. In these instances, using historical data, and drawing on management’s experience can prove useful when coming up with a sales prediction.

Either way, a business with lumpy or unpredictable sales, will require a much greater degree of thought to come up with a sensible sales forecast. Optimism can sometimes take over at this point, so make sure your forecasts are achievable and based on sound assumptions, not your hopes and dreams!

Recording cash inflows

Where the business receives cash in settlement of invoices, these inflows must be recorded in the cash flow. Most businesses operate on credit terms of 30 days, but what if your usual payment profile is more like 60 days after the invoice is raised? In which case you can easily predict the pattern of cash inflows on the back of your sales predictions.

management accounts cash flow forecast

Not all expenses can be accurately predicted, but there are regular recurring payments for which you will have accurate figures, such as rent and utility bills.

When looking at stock purchases, take into account seasonal fluctuations. Many businesses spend more on their stock during the Christmas period, for example.

There will be some unexpected expenses you are unable to predict, but if you can set aside an amount based on a percentage of your outgoings to cover yourself. Then if no unexpected expenses occur, your actual cash flow may exceed expectations.

Regular cash flow projections

You can create cash flow projections on a monthly basis. But it is worth considering weekly or even fortnightly forecasts. Regular projections give you the tools to anticipate the financial health of your business. If you predict that cash flow will be low during a period, you can prepare for this.

Using your forecast

 This is the part many businesses miss! We discuss forecasts and management information with our clients.

If you are going to be short of cash – looking ahead, what actions can you take now to manage this? Actions could include:

  • More focus on sales as ultimately sales = cash in,
  • More focus on debt collection & effective credit control
  • Defer or stop discretionary areas of spend
  • Look at ways of raising finance – do you need a loan or more working capital (we can advise on appropriate sources)

If you are going to have a cash surplus – what opportunities does this give you? These might include:

  • To invest in your business

To look at your remuneration or dividends or pension planning for instance if an owner managed business. If the latter we can look at this with you to optimise your tax position.

For more information

Can’t find the time to put a forecast in place? We can create forecasts for you, and make sure that you maintain a healthy cash flow, please contact either:
Scott Harrower or Lulu Emms, or call us on:

01483 416232