How to forecast cash flow accurately

Cash flow forecasting is one of the most important skills for any business owner. Poor cash flow is one of the major causes of business failure, so being able to accurately forecast your cash flow will help you to avoid problems that could put you out of business.  It will help you make key decisions and run your business more effectively. This article will show you how to:

• Forecast how much money will come into your business, and when.
• Forecast how much money will go out of your business, and when.
• Use your cash flow forecast to make sure you keep money flowing smoothly – and keep your business strong.

Cash is the lifeblood of every business, which makes forecasting it an essential skill. Use this quick calculator to help ensure your forecasts are as accurate and reliable as possible.

Cash flow is simply the daily ebb and flow of money through your business.

• If more comes in than goes out, you have a surplus.
• If more goes out than comes in, you have a shortfall.

Cash flow forecasting is predicting this ebb and flow, so you have the money to pay your bills when they fall due.

As the name suggests, creating a cash flow forecast simply involves forecasting how much money will be coming into the business and when, and how much money will be going out of the business and when.

The structure of a cash flow forecast is relatively simple (use our ANZ cash flow forecast calculator to get started). The challenge is in getting your forecasts as accurate as you can – here are some tips to help.

• Forecasting sales – use previous figures as a basis for your estimates. If your business is a start-up you won’t have previous figures, so you could:
  • Get guidance from an expert, such as an accountant, with experience in your industry. You could also talk to industry associations, if relevant, or organisations like the Chamber of Commerce.
  • Use Statistics New Zealand’s Industry Profile tools to get an idea of your potential sales.
  • Use Inland Revenue’s industry benchmark figures. 
  • Use a 3rd party analytical tool or dashboard.
  • Consider paying for expert assessments of the economic performance of your industry.
  • Get a mentor — or a director, if you have a board — with start-up experience to guide your predictions.

• Consider the season – if your business is affected by the seasons, reflect that in your cash flow forecast. Use the forecast to calculate how much to have in reserves to pay for wages, office overheads and other running expenses during the lean months. 
• Don’t just create a ‘best case scenario’ forecast; consider what is conservative to avoid cash flow problems in the future.
• What other cash will come into your business apart from sales? Examples include interest payments, loans, investments and additional cash injections.
  

• Assessing costs – start by listing all your recurring and automatic payments. Then list the one-off payments you expect.
• Allow for GST – include GST in all figures for both cash in and cash out. This is a good time to talk to your bank about opening up a separate account for this purpose.
• Being accurate – schedule how much and when, as accurately as possible. If you’re not sure how large a cash item might be or when it might come into or out of your business, find out – never guess.
• Use expert eyes – an accountant may spot things you might have missed.

Review your forecast to see whether there are likely to be any upcoming cash shortfalls or surpluses.

If you identify a shortfall, don’t panic – forecasting means you can take action to address it before it becomes a problem. This could include taking out or extending an overdraft, chasing up late payers, taking out a loan, or holding a sale to clear stock and generate revenue.  Check out our guide Improve your cash flow with these handy tips for more tips, and talk to an ANZ Business Specialist about solutions to help you address any shortfalls.

Remember, most businesses experience some cash flow difficulties as they develop – it’s almost part of ‘growing up’ as a business.

If you identify a surplus, consider how you can put that money to best use. For example, you could put it into an interest-earning savings account or term deposit, or use it to grow your business – for example by purchasing new equipment or investing in new ways to market your business.

You can also use your cash flow forecast to assess the impact of many business decisions. For example, if you’re thinking of expanding or hiring new staff, factor into your forecast the likely costs of that investment, along with the expected increase in revenue, to see what it may mean for your bottom line.

Most cash flow forecasts are monthly, but that may not suit your business. For example:

• If you operate a retail cash-only business, such as a hairdressing salon, consider putting together a weekly or daily forecast, so you can pinpoint potential pain points within the month.
• If you’re a builder or a quantity surveyor, it may take months for you to get paid for the work you do. A monthly or quarterly cash flow forecast may be more appropriate.

Review your completed cash flow forecasts regularly, and compare the forecast to what cash actually came in and out (your accounting software will provide the actual figures).  This will help you forecast more accurately over time.

It will also help you to identify trends you need to address. For example, if your sales are lower than forecast, you need to find out why. It may be that a competitor is undercutting you, in which case you may want to review your pricing strategy (see our article ‘Pricing strategy made easy’ for more information).