Tips for preparing your cash flow forecast

An up-to-date cash flow forecast will show you how much money is coming into your business and when, and how much money will be going out of the business and when. This is important, because it’ll help you see where in the future your business may not have enough income to meet expenses, so you can plan ahead.

It’s tempting to approach your forecast with a ‘glass half full’ mentality. After all, no one sets out to create a business that fails. But it’s important to be objective when crunching the numbers.

An accurate cash flow forecast gives you, and the people involved with your business, reliable information that allows you to catch problems early and better manage your costs.

When preparing your cash flow forecast, remember to keep these things in mind.

A good cash flow forecast is not just a worksheet of numbers. It’s the document that people examining your business will spend the most time reading, so you need to make it as accurate as possible. If there are gaps, people may wonder what else you haven’t thought through.

As you complete the cash flow forecast, note the assumptions you’re basing the figures on. These will show anyone reading the cash flow forecast how you arrived at your figures.

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. 

Your forecast for the business must reflect a realistic balance between proper sales projections and an accurate costing and pricing of your goods and services.

The time you spend assessing a realistic sales level is crucial. You should outline exactly how you came to the sales figures for each month.

Don’t forget seasonality. Sales rarely stay at the same level throughout the year. Take some time to consider how sales might fluctuate according to your business cycle, and adjust your forecast accordingly.

Once you’ve outlined your sales for each month, you’ll be able to estimate your costs. You can be certain about some costs (like rent), whereas some will be estimates (power and phone charges). 

Make sure your estimate is grounded in fact. For example, you wouldn’t expect your power bill to be the same in winter as it is in summer. 

You need to explain in detail how you calculated these amounts, so don’t take a stab in the dark. Make sure you include any one-off costs (and payments) you’re expecting as well.

Be honest with yourself about the capacity of your business. Step back from the numbers and take a sense check. Don’t set income at $50,000 for a month unless you can physically do it. There are only so many hours in one day. 

Remember, a large order might sound good on paper, but comes with extra costs such as staff, materials, and equipment. If you’re not equipped to deal with the extra workload, it might cost you in the long run.

If you can, find out your industry information such as average net profit and gross profit amounts. If you differ from the average, people will want to know why. 

As a joint initiative, Statistics NZ and Inland Revenue have created an industry benchmarking tool to help you understand what’s happening in your industry.

Ready to dive into the numbers? Use our quick calculator to help ensure your forecast is as accurate and reliable as possible.