Good cash flow is the life blood of a healthy business.

Good cash flow is the key to ‘business health’ and is the ‘life blood’ of all businesses, so planning and forecasting what will happen and when it will happen is tantamount to a successfully run business.

Having the tools to optimize those cash flows and being able to forecast cash flow and run what-if scenarios with your ‘Cash Flow Projections’ is key. Having easy-to-use cash flow forecasting software is a necessary tool for business owners and accountants working on behalf of their client to produce professional reports.

When making decisions about how to optimize future cash flows, it is imperative to have well-prepared cash flow forecasts to review and present to your management or to investors or the bank where your business is seeking financing.

Some key areas to consider when preparing the cash flow forecast are as follows:

1. Forecast Period – Depending on the cash flow usage and profit forecasts will depend on the period for which you need to prepare reports. Typically this would be for a period of 3 years, but in some cases this may be for longer periods and can be up to 7 years.

2. Professional looking reports: Professional looking reports are essential and should include at a minimum: a cash flow; a profit and a loss; and a balance.

3. Additional Reports: Additional reports to the essential ones above include: an assumptions report showing the key assumptions used in the preparation of financial forecasts; a forecast summary page with break-even analysis; a business summary showing the product lines of the business and the associated cost of sales; a general report showing a full breakdown of business expenses; a report of fixed assets with associated depreciation; a loan report showing bank loans, installment purchases and the like; and a VAT/Sales Tax or GST report.

And if the scenarios

Once you’ve prepared your reports, it’s always a good idea to run several what-if scenarios and print the resulting cash and earnings forecasts to reflect any changes to the assumptions you’ve made. It is extremely useful to do a sensitivity analysis of your numbers to see how your future cash flows might be affected, for example by a reduction in sales of say 10% etc.

The figures

As you put the numbers together to insert into your cash and profit forecasts, you’ll need to review your current overhead expenses and decide how they’ll change in the future—for example, how much your current facility costs. in terms of rent and property taxes, so forecasting this expense will be a breeze. However, forecasting your sales can be a bit trickier, but the associated cost of those sales will be easier to calculate if they fit your current costs.

When you decide to forecast your sales, you’ll need to be able to back up your claims, and certainly if your claims are higher than last year’s profit and loss, you’ll need to be able to explain the increase. Similarly, you will need to be able to explain your overheads and any increases or decreases in these figures from your previous information.

Profit and Loss vs. Cash Flow

Make sure you understand the difference between profit and loss and cash flow, for example, if your business is registered for VAT (sales tax or GST) and if customers are late paying you because you provide credit terms, then the sales amount will be included in the profit and loss account will be different from the amounts included in the cash flow reports.

Let me explain this for the sake of clarity as an example: Suppose your January sales are £10,000, excluding VAT and it takes your customers on average 30 days to pay their invoices.

The amount to be included in your profit and loss account for January would be £10,000, whereas for the same set of sales, the amount included in the cash flow would be £11,750 (where VAT is 17.5 %) and would be included in the month. of the month of February. Likewise, the VAT on these sales would be included in the payment to the Government (where it is paid quarterly) with the sales of the following two months, minus the VAT on purchases, in the month of April as a cash outflow.

realistic forecasts

It’s vital at the end of the day that your cash flow forecasts reflect what is a realistic prediction of what you think will happen, so that when you report to your management, a bank or investors, they have confidence in what you’re doing. . said and therefore will be happy to invest or lend money to the company in case this is the reason for the preparation of these forecasts.