In an economy currently battling rapidly rising inflation, cash flow forecasts have become increasingly sought-after reports from finance providers and lenders as part of finance applications and annual reviews. 

However, preparing a cash flow forecast shouldn’t just be a box-ticking exercise, there are a number of benefits for your business in regular cash flow forecasting.

As the old saying goes,

Profit is important, but cash is king”.

Cash flow is a key gauge of the financial health of your business.  A business with poor cash flow will likely have difficulty meeting creditor obligations and debt repayments, issues that if not carefully managed could ultimately lead to insolvency. Well-managed cash flow however can provide you and your business with financial security and opportunities for further growth.

A cash flow forecast projects your business’s cash inflows and outflows and closing cash position for a given period of time. It can be useful to identify optimal periods for making large purchases and expenditures, and times when further financial assistance may be required in advance.  While it is impossible to predict what exactly the future holds, a carefully prepared forecast can provide some valuable insight into the direction that your business is heading.

How to get the most out of your cash flow forecast

• Review and adjust your forecast on a regular basis - Periodically reviewing your forecast is an excellent habit to get into. Compare your projected cash flows to your actual cash flows each period, have you met your projected cash position for the period?
  
  If so, well done! If not, identify what has caused any change from your projections. Is it a temporary timing difference or a permanent change?  What is the flow on effects for future periods?  What can you change to get your projections and business back on track?
  
  Regularly reviewing and adjusting your forecast will hold you accountable and enable you to carefully manage your cash position.  We would recommend reviewing your forecast on a monthly basis at a minimum.
  
  
• Tax Planning & Budgeting – Nobody likes to be left with a large tax bill at the end of the financial period! Regularly monitoring both your business’ performance and cash position allows you to ensure that you are paying enough provisional tax throughout the year or at least putting enough funds aside to cover your terminal tax liability at year-end.
  
  Before you take out those cash drawings, are you leaving enough in the business to meet your tax liabilities? Calculating tax liabilities can be complex, our friendly team are more than happy to assist you with this process.
  
  
• Negotiate additional overdraft facilities and finance in advance – Your bank/finance provider is a key stakeholder in your business and an important relationship to maintain. This is particularly important if you operate a business with seasonal sales/cash inflows that rely on overdraft facilities to get through periods where there is little income coming in.
  
  A cash flow forecast will enable you to identify periods where extra finance is required and overdraft limits may be exceeded.  Front-footing expected temporary cash shortfalls with your finance providers could prevent a breach of your banking covenants and keep your finance provider on your side.
  
  
• Be attentive to detail – While prior period results can be a useful guide when forecasting, it is important to understand and apply the drivers of your income and expenses. This will ensure that your projections are realistic and as accurate as possible. Businesses providing services – how do your staff levels and chargeable hours compare to last year? Are your current charge-out rates covering your costs and other cash outflows?  Do your charge-out rates need to be increased? 
  
  Businesses operating in the farming sector are recommended to prepare a livestock reconciliation as part of the forecasting process. Using your opening stock numbers at the start of the year, adding projected purchases, deducting projected sales and ensuring that this matches your projected closing stock numbers at year-end. This will ensure livestock sales are not overstated and purchases are not understated.
  
  Be sure to include an allowance for deaths & missing in your reconciliation and check that your natural increase/births are realistic.
  
  
• Be conservative but don’t under-sell your business – Unfortunately in life, perfection is difficult to achieve and things do not always go exactly to plan.
  
  Generally, there will always be some unexpected costs that arise in your business, therefore it is important that realistic allowances are made for these. Particularly in these challenging times, there is a lot of disruption in businesses, so it is unrealistic to forecast income levels driven by 100% productivity from your staff. 
  
  While being conservative is key, it is important not to undersell your business either – particularly if your finance provider is requesting a cash flow forecast as part of a finance application.  It is best to be as realistic as possible when preparing a cash flow forecast.
  
  
• Plan your asset purchases – Replacing vehicles and plant & equipment can be an expensive process. A cash flow forecast can be utilised to time the purchase of these big-ticket items for periods where there are surplus cash reserves available. 
  
  Avoiding making large asset purchases in periods where there are low cash reserves can help prevent un-arranged overdrafts and interest charges and failure to meet creditor and debt repayment requirements.

Cash flow forecasting is not just a formality; it is a powerful tool for managing the financial health of your business. In an economy riddled with challenges, cash flow forecasts can provide stability, insight, and growth opportunities.  By reviewing and adjusting your forecasts regularly, engaging in proactive tax planning and communication with finance providers, paying attention to detail, balancing conservatism with realism, and strategically planning asset purchases, you can harness the true potential of cash flow forecasting.

If you require assistance or would like to develop a cash flow forecast, do not hesitate to reach out to your advisor. We are here to guide you on the next steps toward securing your financial stability and driving your business toward future success.