Cash flow forecasts provides an organisation with a clear picture of cash inflows and outflows over a specific period, usually a year.
What are the benefits of preparing a cash flow forecast?
• Identifies cash deficits and cash surpluses in advance
• Shows what you need to borrow, how much, when, and how the loan/overdraft will be repaid
• Highlights the impact of getting and receiving credit from suppliers and customers
• Provides you with time to take action e.g. defer planned expenditure, bring forward a cash receipt
How to preparing a cash flow forecast?
• Link it to your financial budget
• Look at your budgeted income for the year
• Breakdown income down into month of receipt
• Allocate expenditure into the months it will be paid
• Add in your opening reconciled bank balance
A cash flow forecast can be broken down as follows:
• Cash inflows
• Cash outflows
• Net cash surplus/(deficit)
• Opening bank balance
• Closing bank balance
Your forecast should take this into account and provide a complete picture of where cash will come from and how it will be used for the period being forecast.
• While a cash flow forecast should be consistent with other financial reports, it must also reflect how cash actually flows
• The timing of cash receipts and payments and how they are forecast will depend on the business activity
• In some cases there may be a relatively even flow of cash in and out during the period being forecast.
• Or cash receipts and payment may be concentrated on certain dates within the year
• The nature of the business, your past experience and any expected future developments should be taken into account in forecasting
• A cash flow forecast is generally done by periods, e.g. by month
• This may be further broken down into weeks, to define cash flows more precisely during the month, allowing you to indentify cash surpluses and deficits within the month, thus allowing more targeted cash management actions
• The more defined you can make you forecast, the more it will help to plan and control your finances, maximising the use of surplus funds available and minimizing the costs associated with borrowing to finance operations
• Only outflows can be totally controlled
• Inflows depend on outsiders behaving in an agreed fashion e.g. a sponsor paying you as agreed per their contract.
Forecasting cash outflows
• In forecasting the uses of cash in operating activities it should be kept in mind that cash expenditure will not necessarily be the same as operating expenses for profit and loss account purposes
• By its nature a cash flow forecast is prepared on a cash basis, so while many cash expenditures also represent operating expenses, there will be some timing differences such as prepaid expenses and payment of expenses accrued in prior periods
Factors to consider when forecasting cash outflows
From a Profit & Loss perspective, payroll expense is gross wages and salaries, but from a cash flow standpoint you would pay the net salary at a different time to when you pay over the payroll taxes to revenue. There would be two line items of expenditure in the cash flow forecast.
Payments to suppliers
From a Profit & Loss view, the expenditure is recognised once the invoice is received. From a cash flow perspective the expenditure will be recognised and paid based on the terms and conditions of supply e.g. if you receive 60 days credit from your supplier, then in your cash flow forecast you if you plan to purchase materials in month one the cash outflow will be forecasted to happen in month 3 sixty days after the purchase.
Payments are generally made on the same date each month and this can be forecasted based on the lease agreement in place
Payments for service agreement/maintenance contracts
• These can be forecasted based on the agreements in place.
• Other repairs could be forecasted based on historical experience, and bearing in mind, the age, working condition, usage and the general maintenance requirements of the plant and machinery, equipment and motor vehicles etc
Advertising and promotion expenditure
• May be based on agreements or planned activities and can be forecasted accordingly
• May be forecasted as a function of sales
Payment of utilities
These expenses would generally be paid the same date each month and can be forecast based on historical experience, changes in the level of activities, rate adjustments, season variations and growth of the business (these factors would have been taken account of in your budget for the year which you will be using to formulate you cash flow forecast)
There are set dates for the payment of payroll taxes and VAT which will assist you in preparing your cash forecast
These expenses are generally made in advance and payment can be based on the renewal date of policies. It might be advisable to enter into an instalment arrangement and spread the outflow over a number of months if there are cash flow difficulties.
Balancing a cash flow forecast
• By entering the known and expected, or anticipated and estimated cash receipts and payments by month for a 12 month period you will be generating a cash flow forecast.
• When you can see how your cash balance rises and falls during the forecast period, you will know when to expect cash surpluses and deficits and you will be in a better position to make decisions regarding cash management
• The idea behind cash management will be to even out cash flows, make the best use of existing resources, minimise financing costs and obtain the best return on cash investments
If you need assistance with the preparation of monthly management accounts, forecasts and budgets please contact Deirdre McDermott, Director – OSK
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