How to forecast cash flow accurately

Being able to accurately forecast your cash flow is an essential business skill. Poor cash flow makes it much harder to make a profit – so getting it right matters.

The first step is understanding what cash flow is. It’s essentially the daily ebb and flow of money coming into and going out of your business. If you have more money going out than coming in at any time, you may not be able to pay your bills – which could put you out of business. And it can happen even if you’re trading profitably.

Cash flow forecasting is basically the process of forecasting when money is coming in and out of the business. It helps you predict when you are likely to have cash shortfalls so you can do something about them before they happen. Doing regular cash flow forecasts will help you sleep better at night. It will also help you with key business decisions (e.g. the best time for purchasing new assets or making investments in your business), as well as managing your debtors. In other words, cash flow forecasting is a really good idea!

Typically, you’ll use an accounting or spreadsheet program, because forecasts essentially follow a cash book structure. For example, you can use our quick calculator to help ensure your forecasts are as accurate and reliable as possible.

Here’s some key rules for creating your cash flow forecast:

• Assessing costs – start by listing all the recurring and automatic payments you’ve got going out. Then tackle the one-offs you could expect.
• Be GST inclusive – use GST inclusive figures in your cash flow forecast, and include GST payments in your expenses (cash outflow) section.
• Forecasting sales – an established business can use previous figures as a basis for your estimates but if you’re a start-up, take advantage of expert guidance such as accountants with experience in your industry. Be realistic.
• The importance of accuracy – schedule figures and timings as accurately as possible. Never just lump in a general cash-in or cash-out total or guess about timings. If you’re unsure when a cash item might come in or out of your business, or how large it’s going to be, find out – never guess.
• Take seasonality into account – if seasonality is an issue for your business then the cash flow forecast should also prompt and encourage you to put aside reserves to pay for wages, office overheads and other running expenses during the lean months.
• Most cash flow forecasts are monthly – think about whether this structure suits your business. If you operate a retail cash-only business, such as a hairdressing salon, then your cash cycle is basically one day. You may want to put together a weekly or daily forecast, so that you can pinpoint potential pain points within the month. If you are a builder or a quantity surveyor, your cash cycle is likely to be much longer - it may take months for you to get paid for the work you do.
• Expert eyes – an accountant may spot things you might have missed.

After you’ve constructed your first cash flow forecast, it’ll become one of the most important tools you’ll use in your business and one you’ll bring out on a monthly or even daily basis.

You should review your completed cash flow forecasts regularly. Our cash flow forecast calculator has columns for actual figures, which you should fill in once available. Your accounting software should be able to help with this.

Investigate any discrepancies between actual figures and your forecast to help improve your future forecasts.

When you first put together a cash flow forecast, expect errors and omissions. It will get better with time.

Don’t panic. It’s good you spotted this now, because you’ve got time to adjust. If the cash shortfalls you've identified are greater than your overdraft, talk to an ANZ Business Specialist. They can work with you to help you further identify the sources of your cash shortfalls and the solutions you can use to reduce or address them. There are a few actions you can take, such as extending an overdraft, or identifying and chasing up late payers.

In spite of your best efforts to plan your cash flow rhythms efficiently, you'd be very lucky not to experience a cash flow issue at some stage or other. Most growing businesses experience some degree of cash flow difficulties as part of their development - it's almost part of growing up as a business. What distinguishes competent business owners is their ability to predict such events because their fingers are firmly on the pulse of their businesses.

If you manage your cash flow well there may be times when surplus cash can be placed into interest earning deposit accounts. An ANZ Business Specialist can discuss available options with you.