5 Essentials For a Cash Flow Forecast

When it comes to cash flow forecasts they come in various formats. For us, a business is normally producing a cash flow forecast because it is required by a lender as part of the process to secure finance.

When producing a cash flow forecast there are five key things that need to be considered. Before you start creating the figures to fill in that spreadsheet here are five things that are essential in any successful cash flow.

1 – Objective

Ask yourself – why am I producing a cash flow forecast? It may sound a simple point but it is one that is often missed. Like anything you do in your business the task must serve a benefit, exactly why are you producing the cash flow now?

Be clear about why you are doing it as reasons why will drive the level of detail and level of explanation that is required e.g. duty to disclose actual client names, or can you simply title it all as sales? How much detail is required on the costs, do you need to break down costs by every location or can they be one lump sum figure?

I have seen clients produce three variations of the same cash flow forecast when applying for finance. These are titled as ambitious, conservative, and worse case. If you provide free forecasts to a lender they will ignore the first two and only read for worse case version. You can very quickly shoot yourself in the foot this way.

Be clear about the objective and have faith that your forecast is as realistic as it can be.

2 – Model

Let’s get this one straight. The figures in a cash flow forecast are less important than the model that was used to create them.

If you can spend time on creating a forecast then it is worth spending longer at the outset establishing the model. It is a common mistake, especially when raising finance, that the model used to generate the figures is either not robust or not in existence at all.

Let me explain. If you’re forecasting your sales then have a model around which the sales forecast is based e.g. my shop is open for 10 hours per day, I see 20 customers per hour, half the customers buy something and the average spend is £5. This means my shop generates £50 per hour and £500 per day.

Every model will be different but providing you have a robust model that you can justify and support it makes it very hard anyone to argue that your figures are incorrect or unrealistic.

3 – Opening balances

This one is a common error. Not every cash flow forecast begins at zero. Most businesses will either have cash in the bank or a debit balance as the starting point.

Just because your spreadsheet starts at zero does not mean your cash flow forecast should be starting at zero. For a lender, incorrect opening balances start to generate questions about the quality of the figures being provided and it is not something that you want. One is a very slippery slope.

4 – Expertise

Who is the right person to produce cash flow forecast? It is not always the finance director nor should it always be your accountant.

If the model that is used to generate your figures is correct then it may be department heads or other people within your company who are the ones providing details. It may then be the job of the FD or your accountant to act as an overview and check the legitimacy of the figures.

In a small business, I am a supporter of the business owner producing the cash flow (as I am with the business plan). This is because they know the business best and will be the ones having to explain the forecast to any third party. In this instance, it is often better that the small business owner spend their time working to get the model correct then pass the work to an accountant or other expert to review.

This means that small business gets the best of both worlds, they understand how the figures are produced and get level of expertise to sit behind them and provide legitimacy.

5 – Audience

Who is going to see this forecast? If your cash flow is going to remain a spreadsheet filed somewhere on your hard drive, or to be printed off to live in a drawer then there really is no point in doing the work at all.

In almost every case there is a purpose to producing a cash flow forecast.

The terminology used within the cash flow forecast should reflect the audience working on the document. This will determine the level of jargon, what client or project names are being revealed and whether any other confidential plans are included within the forecast.

I did once see a forecast that had been passed to an FD to complete, only for the FD to see a reduction in his salary worked into forecast six months down the line. In this event the company had planned to replace the FD, you can imagine the issues caused!

Consider your audience as this will tell you what content and level of detail you provide.

If you have any questions about this post, then please add them above or use the contact form below to get in touch.

By Dave Farmer

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