How to forecast business cash flow

in Money by Anthony Fensom
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forecast business cash flow

Cash is the lifeblood of all businesses, making forecasting business cash flow crucial to success. Without sound cash flow management, even the most profitable business is at risk of insolvency, particularly during soft economic conditions.

According to Dun and Bradstreet's September 2013 Business Expectations Survey, 64 per cent of the Australian businesses surveyed expected cash flow to be the biggest barrier to growth in the year ahead, followed by operating costs.1

Exacerbating the cash flow risk, the survey found that companies are taking an average of 54 days to pay invoices, or more than three weeks beyond standard terms. According to recent ABS data, an average of 44 small businesses per day are closing their doors, with the majority of failures due to poor cash flow.2

Cash flow forecasting is vital in identifying potential shortfalls, ensuring suppliers and employees get paid on time, spotting problems with customer payments and as a source of reassurance for external stakeholders, such as financial institutions.

How can owners better forecast business cash flow to remain afloat?

Doing the forecast

The cash flow forecast basically represents the expected future movement of cash in and out of the business, in terms of receipts (income) and payments (expenses). The general formula is given by Net Cash Position = Receipts less Payments, with forecasts typically done over a 12-month period.

Cash flow forecasts can help predict upcoming events such as tax decisions and equipment purchases, or the hiring of additional staff, identifying any cash flow gaps where outflows exceed inflows. By including the most likely, best and worst-case scenarios in the forecast, it is possible to identify how the business would cope in tough times, or if it suddenly boomed, and plan accordingly.

BusinessVictoria offers a free cash flow worksheet to help forecast and record cash flow, based on the following steps:

  • Step 1 - Prepare a sales forecast: For existing businesses, check the previous year's figures and decide what adjustments are needed based on past trends. For new businesses, start by estimating all the likely cash outflows, which will allow an estimation of how much cash is needed to cover costs and determine the required amount of sales.

  • Step 2 - Estimate other cash inflows: These can include GST rebates and tax refunds, government grants, royalties and loan repayments.

  • Step 3 - Prepare detail on all estimated cash outflows and expenses: Estimate cost of goods sold along with expenses on administration, new assets and payments to the owners.

  • Step 4 - Prepare the cash flow forecast: Compile all expected cash inflows and deduct the cash outflows for each period, usually on a monthly basis. The number at the end of each month is the closing cash balance, which becomes the opening cash balance for the next month.

  • Step 5 - Review estimated cash flows to actual: Once you have developed the forecast, go back and check the estimated against actual cash flows for the period. This should aid in future forecasting and improve the accuracy of your projections, as well as identifying areas where the business is underperforming.

Once the forecasts are done, experiment with the projections for cost of sales, overheads, sales prices, debtors, inventory and creditors to identify areas where business performance can be improved.

Forecasting tips

  • Be as accurate as possible with the forecasts, including having an accurate stock reconciliation. Take account of seasonal variations to the business or other timing events.

  • Update the forecasts regularly and review them on a monthly basis.

  • Have your accountant or financial advisor check the initial forecasts to ensure they are in line with industry performance.

  • If surplus cash is forecast for some months, consider investing it in short-term investments to maximise income. Alternatively, plan for an appropriate loan or other funding if shortfalls are projected. Do not forget to include these extra payments or receipts in your forecast.

  • By planning appropriately and reviewing actual performance, it can be possible to turn cash flow to your advantage and ensure the long-term survival of your business.


1Economic revival to skip 2013 as business outlook goes flat. D&B (2013).

2Average of 44 small businesses closing their doors each day, according to Australian Bureau of Statistics data. Lisa Cornish and Samantha Landy (2013).

This article represents the views of the author only and not those of American Express.

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Anthony Fensom

Anthony is a communication consultant at BWH Communication and a freelance writer with 15 years' experience in the stockbroking and media industries of Australia and Asia. He is a regular writer on business and other issues for publications in Australia and Japan. He consults on communication strategy to businesses ranging from private enterprises to professional service firms and publicly listed companies, with a particular interest in entrepreneurship in all its forms.

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