Cash Flow Forecast and Cash Flow Forecast Template

What does one understand by cash flow forecast?

A cash flow forecast is a tool (download a free template) which determines how much money a company would have in the near future. To understand how sustainable one’s business plan is and whether the company is going in the right direction or not financially, a cash flow forecast is required. It provides an estimate of how much money the company would make in future using the company’s current resources and estimated expenses.. (there are certain expenses which are exempted known as exempt expenses) By knowing the financial condition of one’s company, one can indeed change the course of it and make it more profitable.

Cash flow forecast is almost mandatory these days and isrequired while applying for any business loan especially for start-ups and small businesses. For getting loans from banks and the government, one must prepare their sheets from an expert accountant. Thisforecast provides a comprehensive analysis of the company, about its financial status in future and also whether the company’s business plans are sustainable are not.

Cash flow forecast and their duration

Cash flow forecasts are prepared either for one month, one or two weeks ora period of 12 months, depending on the company’s requirement. A monthly cash flow forecast might have an overall positive result with negative results in one or two weeks. It is entirely up to the business head to take the negative value of a few weeks into consideration or not. A few loan companies might consider the negative aspects of a few weeks, and in such a case it is advisable to consider and try alternating the business plan.

What is the major difference between cash flow forecast and profit and loss account?

The significant difference between cash flow forecast and profit and loss account is that it shows the amount of money that has been taken out or invested in the business. The entries in a cash flow forecast would be different from a profit and loss account. The amount entered intoa profit and loss account would be different as that of a cash flow forecast.

benefits of a Cash Flow Forecast in UK

The following are the various advantages and benefits of a cash flow forecast

• It helps you to plan your future efficiently.
• Helps you to understand and improve your business performance.
• Helps you take sensible decisions regarding your business.
• Allows you to take realistic decisions that will garner more profit and benefit for the company in the long run.
• Helps you in maintaining your finances.
• A cash flow forecast tool is ideal to plan and efficiently use one's resources.

The following are the list of information that one would need to prepare a cash flow forecast

• Details about one’s opening bank balance:

  Yes, your opening bank balance value of bank account is of high importance and needs to be mentioned while preparing a cash flow forecast. If your bank balance at the end of the cash flow forecast is higher than your opening bank balance, then that means that your company is successful and profitable. But if your company’s bank balance at the end of the cash flow forecast is lower than your opening bank balance, then that means that your company is not successful and is incurring a great deal of loss.

• Dividend and taxation payments:

  One gets dividend payments if they own shares in a company. Dividends over £5,000 are taxed based on the basic rate which is 7.5%, higher rate which is 32.5% and additional rate which is 38.1%. If your company’s dividends are less than £5,000, then you are not required to pay the tax, and if it is above £10,000, then you would have to fill in a self-assessment tax return form, which is a system used by Her Majesty’s Revenue and Customs to collect income taxes. Thus, if your company has been paying dividends and taxes, then make sure you provide all that information before doing your company’s cash flow forecast.

• Details of stock purchases:

  Stock purchases are vital for a business’s growth and need to be mentioned in complete detail while preparing the cash flow forecast. One must also remember that stocks are also subject to taxes which has to be paid.

• Customer receipts:

  A customer receipt would consist of information of the kind of service provided by the company along with the date on which the service was provided and the total amount. These receipts are extremely important, and a copy of it has to be maintained by the company at all times.

  What are the three main sections of a cash flow forecast?

  The three main sections of a cash flow forecast are as follows

  The Revenue, the Expense, and the balance.

• Revenue :

  Revenue is what money goes into your business and consists of the company’s sales, capital, and other investments. One would have to tally all their revenue sources and list it out as their total income, which is a common value for the entire company.

  The number of items one would include in their revenue list differs from company to company and from business model to business model. Certain companies only include their top investors whereas others include every investor and sales value of the company.

• Expenses

  Expenses are as vital as one’s revenue and need to be added with absolute caution. Staff salary, office rent, marketing and advertising expenses, travel cost, tax, dividends, loan repayments and others. While calculating your overall expense, make sure you include every expense your company incurs to get the accurate overall expense value.

• Balance

  In this section, the total revenue value and the total expense value is subtracted to find out the balance amount also known as the net cash flow value.

  If the balance value is negative, then that means that the expenses are greater than the revenue and if the balance value is positive, then that means that the expenseis lower than the revenue, resulting in profit.

What is a cash flow forecast template?

• While entering the values, you also need to enter the value-added tax value wherever necessary.
• One’s items and its value should not be entered in the template
• Only company related values need to be entered in the template.
• Always make sure that you enter accurate values without any discrepancies.
• Templates are usually flexible where one can add or remove items according to their company’s preferences.
• Ensure that you follow your company’s objectives while entering the details in the template.
• Always set realistic goals and make sure you meet them. While setting sales targets, always go in for realistic goals, which your company would be able to meetin the near future. It is always better to achieve realistic goals than to miss out on not-so realistic and over-ambitious goals.

What is a recurring cost?

A recurring cost is a type of cost that won’t change in due course of time. It is known to be constant and prime examples for that are rent, loan repayments, and others.

What is an ad hoc cost?

An ad hoc cost is the exact opposite of a recurringcost and changesconstantlyin due course of time. These costs are related to one’s wants and needs and thus changes depending on one’s requirements. Material costs, travel expenses are all examples of ad hoc cost which differs based on one’s requirement.

While entering values in the template, you also need to consider the promotional activities you are about to conduct and what kind of impact it might have on the sales.

Every company is said to have a full-proof promotional plan which they execute in order to increase their sales. A rough estimate of how much sales a company would incur because of the promotional plan, is to be estimated way in advance and can be implemented in the template. But again, be sure that your estimates are highly realistic and not too over-ambitious.

It's all about estimation

Estimation is key for a company and has to be done realistically keeping in mind several factors such as revenue, expenses, promotional activities and others. One should also keep in the period when the company’s sales would indeed bloom. If you are a clothing company, then festive seasons such as Christmas would be the best time of year for your company and if you are a tourist company, then holiday seasons would be an idealperiod. Thus by analyzing one’s target audience and period, one can indeed predict accurate cash flow forecast for their company.

Here are a few things that you need to keep in mind while preparing your cash flow forecast

• Gross profit: Gross profit is the amount of money that a business makes out of their sales.
• Net cash inflow and outflow: Net cash inflow is the difference between the amount of money earned and spent, and Net cash outflow is also the difference between the amount of money earned and spent, in this case, it is the amount which has been spent more.

How to calculate gross profit?

To calculate the gross profit, you first need to calculate the manufacturing cost of the products that you sell. The cost needs to be absolutely accurate and has to be entered with due diligence. To calculate the monthly gross profit, you would have to consider the monthly cost of sale along with the sales income.

Here is a list of overheads that you might want to consider while preparing your cash flow forecast.

• Amount of money one pays taxes and dividends.
• Web hosting costs
• Fee one pays to their accountants, freelancers and other staff members.
• Equipment costs.
• Renovation costs.
• Office rents along with phone bills, electricity payments, internet fee and others.

To create a profit and loss forecast

The next major step is to create a profit and loss forecast based on the revenue and expense values.

How to finalize one’s cash flow forecast?

While finalizing the cash flow forecast make sure you enter all important values of sales, revenue, and overheads. Your predicted outflows, amount of sales all need to be mentioned in the cash flow forecast. After entering all the values, you now have to calculate the overall cash flow by showing the bank balance at the start and end of each month.

Here are a set of instructions that you might need to follow while entering the values in a cash flow forecast template:

• The first and foremost step to be followed is to add one’s company name along with the financial year they are covering.
• After filling the company’s name, you now have to enter the other details such as expense, tax, overheads and others.
• Fee one pays to their accountants, freelancers and other staff members.
• The next step is to make the entries.

The cash flow forecast template is highly useful and can be used for providing an overall view of the business along with the monthly business and the opening balance. While preparing your cash flow forecast, you also need to maintain and group all your bills in order to enter the values as accurately and as correctly as possible. Cash flow forecasts are also highly useful in predicting whether a company has a positive or a negative cash flow.

Investments are indeed one of the most complex concepts of all which doesn’t guarantee determined profit or loss. It is highly unpredictable and requires a solid backing.

Being accurate with your entries is crucial and determines whether your Cash flow forecast would be valid or not. While entering your values, make sure you enter every single piece of record into your template, which isregularly updated from time to time. The forecast might not be a 100% accurate but would help you to overcome any hindrances or faults in your business strategy or plan. It will also help you to try out different business scenarios and situations and select the best one out of the lot. One can test and try several scenarios and make their business strategy as full-proof as possible.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.