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How to forecast cash flow accurately print Print

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Being able to accurately forecast your cash flow is an essential business skill. This article covers the basics of cash flow forecasting, some top tips, and explains the benefits of managing your cash flow.

Forecasting Cash Flows

What is cash flow?

The first step is understanding what cash flow is. It’s essentially the daily ebb and flow of money coming into and going out of your business. The difference between what you get in and what you pay out is the surplus you have, or shortfall you’ll need to find, in order to keep your business afloat.

Cash flow forecasting

In the entrepreneur's tool box the humble cash flow forecast is a well-worn item. Like a spirit level or tape measure it's pulled out on a regular basis to help business owners size up the tasks ahead of them.

Your first cash flow forecast

Typically, you’ll use an accounting or spreadsheet program, because forecasts essentially follow a cash book structure. We can help you with the ANZ cash flow forecast calculator.

The main thing to keep in mind is that you need to be as accurate as you can when assessing the different types of cash-in and cash-out you can expect. Making assumptions isn’t recommended; you’re just diluting how effective your forecast will be. Drill down into the details and be as objective as you can when working out the numbers:

  • Assessing costs – start by listing all the recurring and automatic payments you’ve got going out. Then tackle the one-offs you could expect.
  • Be GST inclusive – use GST inclusive figures in your cash flow forecast, and include GST payments in your expenses (cash outflow) section.
  • Forecasting sales – if you’re an established business you can use previous figures as a basis for your estimates. If you’re a start-up, start from scratch and take advantage of expert guidance such as accountants with experience in your industry. Be realistic. 
  • The importance of accuracy – schedule figures and timings as accurately as possible. Never just lump in a general cash-in or cash-out total or guess about timings. If you’re unsure when a cash item might come in or out of your business, or how large it’s going to be, find out – never guess.
  • Take seasonality into account – if seasonality is an issue for your business then the cash flow forecast should also prompt and encourage you to put aside reserves to pay for wages, office overheads and other running expenses during the lean months. 
  • Most cash flow forecasts are monthly – think about whether this structure suits your business. If you operate a retail cash-only business, such as a hairdressing salon, then your cash cycle is basically one day. You may want to put together a weekly or daily forecast, so that you can pinpoint potential pain points within the month. If you are a builder or a quantity surveyor, your cash cycle is likely to be much longer - it may take months for you to get paid for the work you do.
  • Expert eyes– an accountant may spot things you might have missed.

Compare your forecast to your actuals

After you’ve constructed your first cash flow forecast, it’ll become one of the most important tools you’ll use in your business and one you’ll bring out on a monthly or even daily basis.

You should review your completed cash flow forecasts regularly. Our cash flow forecast template has columns for actual figures, which you should fill in once available. Your accounting software should be able to help with this.

Investigate any discrepancies between actual figures and your forecast to help improve your future forecasts.

When you first put together a cash flow forecast, expect errors and omissions. It will get better with time.

Deficit? Don’t panic

It’s good you spotted this now, because you’ve got time to adjust. If the cash shortfalls you've identified are greater than your overdraft, talk to an ANZ Business Specialist. They can work with you to help you further identify the sources of your cash shortfalls and the solutions you can use to reduce or address them. There are a few actions you can take, such as extending an overdraft, or identifying and chasing up late payers.

Benefits of cash flow forecasting

Cash flow forecasts aren’t seen as a vital entrepreneurial tool for nothing. There are many ways your business can benefit from regular cash flow forecasting, including:

  • Reducing stress – if you can learn to spot trends and anticipate a cash flow crunch, the more time you have to take action, such as extending an overdraft. It could help you sleep better at night.
  • Making key decisions – you can decide whether to increase or decrease stock levels, or broaden your product range.
  • Reassessing your accounts payable policies – always consult your cash flow forecast before deciding to extend credit or delay payment to your customers.
  • Managing your debtors – a cash flow forecast will help you identify late payers.
  • Planning capital expenditure – you can time asset purchases to when you think you’ll have enough surplus cash. Do take care when using business cash to purchase fixed assets though: ask yourself whether you are leaving yourself short in the future.

Negotiate from strength

In spite of your best efforts to plan your cash flow rhythms efficiently, you'd be very lucky not to experience a cash flow issue at some stage or other. Most growing businesses experience some degree of cash flow difficulties as part of their development - it's almost part of growing up as a business. What distinguishes competent business owners is their ability to predict such events because their fingers are firmly on the pulse of their businesses.

If you manage your cash flow well there may be times when surplus cash can be placed into interest earning deposit accounts - talk to an ANZ Business Specialist about the options available.

Next steps

ANZ’s tools, articles and free workshops can help you forecast your cash flow and manage your money effectively:

Cashflow forecast

Cash is the lifeblood of every business, which makes forecasting it an essential skill. Use this quick calculator to help ensure your forecasts are as accurate and reliable as possible.

download button-22 (Excel spreadsheet, 103kb)

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