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How to do a cash flow forecast  

Cash flow appears to be the reoccurring nightmare for Australian and New Zealand businesses that keep Chief Finance Officers, Finance Directors and nearly all Financial Controllers awake at night.  

One of the common issues for many is Debtors and Creditors are hard to predict, and carrying too much stock leads to the drying up of cash reserves very quickly, without anyone noticing until it is too late.

So how do you stop this from happening to your organisation? How can cash flow forecasting help you? And how do you do a cashflow forecast? This article explains.

3 minutes

Written by Vincenzo DeGioia, Accounting software specialist 

What is a cash flow forecast?

Cash flow forecasting is simply measuring the flow of cash going in and out of a business. Most of the time finance managers/directors want to know how much cash there is to make sure that they can afford to buy products and services and more importantly never run out of cash!

Outgoing cash could include:

  • Stock
  • Payroll
  • Suppliers
  • Sales / debtor collection

What are the consequences of not forecasting your cash flow?

As mentioned above, according to recent statistics over 50,000 small and medium sized business go bust every year. One of the common issues for many is Debtors and Creditors are hard to predict and carrying too much stock leads to the drying up of cash reserves very quickly, without anyone noticing until it is too late.

When companies find themselves in this position, they end up being at the mercy of the credit markets and often it’s either very expensive or companies go bust without the support of the bank. 

Ironically, companies that are in growth mode often don’t realise and find it difficult to plan how their working capital management cycle is going to affect their growth plans. Finance staff never have the spare capacity to do any form of modelling or predicting, particularly because working this out is difficult as most finance systems don’t do it for you, and that is where trouble seems to strike.  

Which companies are particularly vulnerable to this?

Medium sized construction firms tend to have payment terms as long as 120 days and often sub contract to main contractors who often exacerbate problems in the supply chain with late payments when they struggle with cash flow. 

Recruitment agencies often also struggle as they tend to only be able to invoice when they place their candidates and then have 30-60 days payment terms.

Manufacturers often work on much tighter margins and have longer working capital cycles and then have extended payment terms which again causes cash flow problems. They sometime carry far too much stock when they are growing and this erodes the cash balances.

Forecasting remains a dark art in a lot of businesses because it has many variables and finance systems in the main tell you “what’s happened” not “what might happen if…..” 

So if this is the case, what can companies do?

  1. If customers are making slow payments – chase the debt as its money owed and use a finance system and credit control functions to keep on top of payments.  
  2. Only pay your invoice when they are due – this sounds obvious but if someone is going on holiday then encourage them to schedule payments rather than paying early. 
  3. Don't hold too much stock – holding stock can help with order fulfilment but this can tie up cash so try not to hold too much stock. This is common in wholesale and manufacturing industries
  4. Have a solid finance system – make sure that reporting is accurate and is efficiently delivered with software such as Access Financials. Reporting remains a key issue and often problems aren’t identified due to poor/difficult data to understand. Having cash flow forecasting software/tools to run alongside your wider financial systems will help speed up reaction times and make sure growth plans are kept on target and cash remains on the balance sheet.

How to forecast your cash flow

The bigger your business gets, the harder it becomes to measure cash flow - which is when it starts to get complex.

Managing cashflow is often referred to as working capital management. Things that can affect cashflow:

  • Changes in stock levels - if stock goes down cash goes up and vice versa
  • Debtors – the quicker you get paid the more cash you have and conversely if you have long payment terms or clients go beyond those terms the less cash you have
  • Creditors – not paying creditors until the invoice is due or if you are paying early negotiating discounts for early payments

The mixture of all elements of cash flow can either be your best friend or worst enemy. Estimating this is always very difficult particularly in fast paced businesses and there are not many tools out there that can help with this. However, our Cash Flow Forecasting Software is a powerful cash flow projection tool which will allow you to predict your future cash inflow and outflow, allowing you to make better business decisions.

Benefits of cash flow forecasting

Cash flow forecasting has many benefits including:

  • The ability to make sure you have enough cash to grow the business
  • The ability to identify problems before they happen and do something about them
  • Greater confidence in making large purchases/infrastructure

How to manage your cash flow forecasts effectively

Investing in a cash flow forecasting system is a great way to enable your business to effectively manage cash inflows and outflows. Cash flow forecasting software will allow you to look ahead to the future and make better business decisions by predicting your cash flow.

Our cash flow forecasting software sits within Access Financials, and comes with many great features:

  • Integrated reporting - track planned vs actuals in your management reports.
  • Instant calculations - instantly see the impact of your plans on your business's cash flow.
  • Driver-based planning - create cash flow forecasts and budgets based on key operational drivers.
  • Lightning-fast forecasts - quickly get started using trends from your latest financials, or your existing budget.
  • Rolling forecasts - maintain live forecasts and never worry that your data is out of date.

Explore our cash flow forecasting software or book a demo if you'd like to see it in action.

If you've got any questions about the software, you can drop us a message in the live chat at the bottom of your screen or request a call.

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