Tweet

Creating cash flow forecasts

Guest post by: Russell Bowyer

Article Overview: If you are looking to for advice on creating a cash flow forecast then here are a few tips and pointers. Firstly you need to distinguish between what is ‘Revenue and Expenditure' and what is ‘Cash Inflows and Cash Outflows'.

Creating cash flow forecasts

If you are looking to for advice on creating a cash flow forecast then here are a few tips and pointers. Firstly you need to distinguish between what is ‘Revenue and Expenditure' and what is ‘Cash Inflows and Cash Outflows'.

Let me explain this by way of an example:

When you raise a sales invoice to one of your customers there are differences between how this transaction affects profit and how the same transaction affects your bank balance and when.

Let's say you raised the invoice on 28 November 2009 and the invoice was for £1,000 (net of VAT or Sales Tax). For profit and loss purposes you would include £1,000 in the November profit and loss account, which is very straight forward and quite obvious really. However, when it comes to recording the ‘Cash-effect' of this same transaction you have to put a little more thought into how you record it.

Firstly, if you are a business that has to charge VAT or Sales Tax then the amount that you will receive (the Cash-Inflow) will be more than the £1,000. If the rate of VAT or Sales Tax was 15% then the amount of ‘Cash' you will receive into your bank account will be £1,150 and not the net amount of the invoice. Also, not all customers pay you straight away and in some cases customers can take months to pay you. So let's say that this particular customer pays you in 30-days time, which would be on 26 December 2009 (forgetting for the minute that this is in fact Boxing Day!). Therefore for cash flow purposes you would include £1,150 in the December cash flow forecast - giving you a timing difference.

Finally, you would then need to include the £150 as a ‘Cash-Out' part of your cash flow forecast when you paid the VAT/Sales Tax to your Government, which might not be until February 2010.

There are other complications that might come into play with your profit and loss versus your cash flows and you will have a similar complications associated with business expenditure and how these interact with ‘Cash-outflows'.

The best way to prepare a cash flow forecast is to spend a bit of time planning it and reviewing what actually goes on within your business. You will also need to consider any capital expenditure you might be planning and how this impacts on your cash flow and how the depreciation of these assets impacts on your profit and loss account.

Related Articles
  Cash flow forecast software
  Cash Flow Forecasts
  CASH FLOW - You're Forgiven for Misunderstanding the Term!
  How to start a small business
  Internet Cash Flow-Finding A Cash Flow Business

Article Tags: businesssmallforecaster, cash, cash flow forecast, cash inflows, cash outflows, cashflow, flow, forecast, forecasting, revenue and expenditure, software



Related Forum Posts
Tax returns! - Well, this is new on me. i had no idea you could sell a site off. If it's anything like purchasing a non-internet business then you need to check into multiple things. Will you need to finance to purchase? If so, you'll need to calculate the cash flow. Also, find out if there will be any add backs to the cash flow, for example, are there other workers invovled to keep the site running...perhaps workers you won't need when you take the site over? Their salaries can be added back to the cash flow if you will not need them. You must see the top page of the last year tax return (never go off just the P & L's). Did the seller run anything personal thru the tax returns that you wont? That's also considered an add back to the cash flow. What is the gross sales for the 12 months? What is the net income for the 12 months? Make sure the purchase price is justified. You can calculate a ball park range on this by doing 30 - 50% of the gross sales for the year or 3- 5 times the net earnings. What is the web traffic like? Is it steady? Do you have time to run the site or will you need to hire someone to manage it? Make sure the business is supporting itself and is profitable. Does the seller have an initial business plan from when they bagan the business, so you can look it over?
Re: Interrealtionship between financial statements - Yes, it’s necessary to take a complete toll of account transactions. If you don’t, then how would you be able to track your financial figures? For example, If a person sold goods for USD 5,000.00, half in cash and half in credit, then with taken impact of all three i.e. cash flow by USD 2,500.00 balance sheet through both cash and receivable and income/P&L statement by USD 5,0000.00, the transaction will not be complete.
Borrowing money is a pain - When I first began planning out my business idea, I spoke with my financial advisor at TD Canada Trust and she was more than willing to offer me a loan/line of credit provided that I: 1.) Used my personal assets as collateral 2.) Passed a credit check (scored "700" and up I think) 3.) Provided a business plan with financial statement forecasts for the first 3 years of operation (i.e. balance sheets, cash flow statements, and income statements) But since interest rates were like prime plus 2% (about 7-7.5% at the time)... I decided to just use my own money and avoid the paperwork and extra costs. And in my particular case, I only needed a few thousand dollars, so it wasn't a big deal. It's not like I was going to try and borrow a couple hundred thousand dollars for a new restaurant.
Improve your Cash Flow - As we all know, the primary concern of proprietors and managers are cash flows. I would like to share some tips on how to improve the cash flow of your business. 1. Speeding up Collections - collecting receivables earlier, on or before due dates. Discounts for early payments can be one way to do this. 2. Slowing Down Payments - stretch your payables and pay only when it is due. But be careful not to mess up with your credibility. 3. Invest in Marketable Securities - use the money in Marketable Securities and other short-term investments to earn extra cash.
Topics of Interest - There have been some wonderful resources posted in this section. However, I also strongly advise any entreperneur to pick up a few books on personal financial planning; cash flow is key to any business and the best way to start planning good cash flow for your business is to learn some personal financial planning. I have always enjoyed the following: The Millionaire Next Door- Thomas Stanley and William D. Danko Richest Man in Babylon- George S. Clason Rich Dad, Poor Dad- Robert T. Kiyoski and Sharon L. Lichter There are many many more great resources on this topic. These should be read in conjunction with the other resources posted here. Good luck.


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Tweet

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

Convening a focus group for a niche product

SEO Gurus, Software and Ebooks

Google Panda and Your Search Engine Rankings

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.