Producing a cash flow is not difficult providing the business already has reasonable bookkeeping or accounting records. Manual accounts are fine although accounting software is likely to produce the best information base from which a cash flow forecast can be prepared.
There is not one specific format that a cash flow forecast can take. Each business may require varying degrees of accounting information and accounting cash flow templates can be anything from a detailed list of all cash incomings and outgoings to totals of the main elements.
In essence a cash flow forecast represents the anticipated movement of the money coming in and flowing out of a business. Larger businesses that use sophisticated accounting software and employ accountants will already have cash flow statements as part of the financial control function.
Many small business organisations including those using accounting software may have the technical ability to produce a cash flow forecast but often either do not do so or ignore the use of the liquidity forecast as an essential business tool. Small business is the area most at risk through ignorance of using a cash flow forecast.
A simple cash flow forecast would be a comparison of the monthly movements in the working capital of a business by comparing the movements in the current assets taken from the balance sheet.
Preparing a cash flow statement based upon just the working capital ignores fixed asset investments and financing of the balance sheet of which a small business usually has individual knowledge anyway. They are important issues and can have a huge impact on business liquidity but the area discussed in this article concerns mainly the working capital cash flow forecast.
A working capital cash flow forecast is a comparison of the current assets and current liabilities shown in the balance sheet. Current assets include stock, debtors and the cash or bank balance while current liabilities include creditors and the bank balance if the business is in overdraft.
Start the template by listing these balances from the last set of prepared accounts entering each account heading on a different row. That provides a snapshot of the company liquidity. Add into the forecast the annual sales and annual purchases.
By dividing the debtors that is the sales income still owed to the business into the sales turnover and multiplying by 365 the average number of days debtors are outstanding is calculated.
On a similar basis by dividing the creditors which is the total purchase expenditure owed by the business into the total purchase expenditure and also multiplying by 365 the average number of days creditors outstanding is calculated.
The next stage in the cash flow forecast would be to add into the succeeding columns the forecast sales and purchases for the periods for which the cash flow forecast is being prepared. A monthly forecast would be suitable for most businesses as it would only be on a monthly basis that a balance sheet is prepared.
Having entered the forecast sales and expenditure it is then necessary to split these figures over the forecast months. Having forecast the monthly sales and expenditure the cash flow forecast then needs to show when those sales are expected to be received and when the purchases are expected to be paid. This should be calculated using the average number of days credit from the first set of actual figures used when preparing the forecast.
A forecast is required of the likely stock levels taking into account seasonal and strategic changes. The combined increase or decrease in the debtors, stock, creditors and also other fixed asset expenditure, taxes and dividend or financing arrangements has to be calculated to produce a forecast cash and bank balance.
On a separate row it would be useful to record under the cash and bank balance the actual funding available which typically would be the bank overdraft facility.
Having completed the initial working capital cash flow forecast it should then be examined in detailed to determine if the business has sufficient funding to continue trading throughout the forecast period.
The real benefits of the cash flow forecast is not just to compare the movements during the year but to update the forecast by replacing the forecast figures with the actual numbers so progress can be tracked.
The critical use of such a forecast would be to plan how the forecast can be improved by increased stock control, better credit control and extended supplier arrangements. List each planned action and use the cash flow forecast to monitor progress.
By monitoring progress the business is using the working capital cash flow forecast as a business tool and will be alerted to changes providing the critical early warning signs of impending difficulties which will affect many businesses during a credit crunch.
Businesses and small business in particular regularly has periods of lower sales and low profits, even losses. These can be withstood and overcome through the understanding of the specific business and putting effort into the areas requiring action.
Early warning signs of credit tightening and a plan of action are critical to the survival of a business. Sales and net profits determine how well a business does. Cash flow and adequate working capital determines whether a business survives.
Terry Cartwright is a qualified accountant at DIY Accounting designing UK Accounting Software on excel spreadsheets providing complete Bookkeeping solutions for small to medium sized companies plus accounting packages producing automated copies of the Self Assessment Tax Return for self employed business.
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