Cash Flow Forecasting

Cash Flow Forecasting-ENT 650

Financing for your company can be determined by preparing a cash flow forecast. Your financial needs can be managed much better when this forecast in place. “The forecast will tell you if your business will have enough cash to run the business or pay to expand it. It will also show you when more cash is going out of the business, than in.” (Business Victoria, 2017) Financing needs can change due to short term growth such as holiday or seasonal sales and long-term development for expansion due to demand which also will require an increase in employees. Repairs or new equipment also need to be taken into consideration. (Rogers & Makonnen, 2014)

Forecasting is about the future. Your future sustainability and your future growth. Forecasting for an existing business starts with the previous year’s sales. For a start-up, an estimation or assumptions will be used. By estimating all your expenses or outgoing cash, you will be have a better picture of the sales or capital needed to cover the expenses. A three to five year plan is a good start.

Outflows and Inflows will look different for the type of business. Below are just a few considerations for each category given by Business Victoria.

OUTFLOWS INFLOWS
Operation expenses Rebates and refunds
New assets Owner investment
Loan repayments External grant funding
Payments to owners Sale of assets
Investing surplus funds Royalties

Once you determine what capital is needed, another important consideration is when to obtain it. Rogers and Makonnen offer two common practices-Series of Funding and All Funding at One Time. Series is getting “only what you need year to year… [and All Funding] is that you should get the maximum that you will need at once.”(2017, pg. 84) Both offer uncertainties, but the determination is based on the confidence you have in the forecasts.

Accuracy in forecasting is crucial for cash flow management. You are not only looking at the inflows and outflows, but also timing. Your projections determine your success and growth. Part of the process also includes checking actual results with what has been projected, which we will take a closer look at in the Cash flow management blog.

Resources to help you manage this process include software packages like Quick Books and Excel Templates.

RESOURCES

State Government of Victoria. (2017, July 21.) Cash flow forecasting. Retrieved September 20, 2017, from http://www.business.vic.gov.au/money-profit-and-accounting/getting-paid-on-time/cash-flow-statement-projection-with-template

Rogers, S., & Makonnen, R. (2014). Entrepreneurial finance: finance and business strategies for the serious entrepreneur. New York, NY: McGraw-Hill.

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