Cash Forecasting

Cost control and budget discipline are very important, but as you know only too well, cash is king. Without sufficient cash your business will fail. An accurate cash forecast could be the single most important document your business has.

Key principles of preparing a cash forecast

  1. Choose a method for preparing the cash forecast
  2. a) Manually, on paper, or using a spreadsheet (e.g. MS Excel)
  3. b) A spreadsheet is much easier and allows much more flexibility for any information that involves numbers. If you are prepared to put in some effort, taking a course in spreadsheets (e.g. MS Excel) could be the most useful few days of your business career.)
  4. Always assume income will come in slightly later than expected.
  5. Always assume expenditure will go out slightly earlier than expected.
  6. Include all sources of income and all expenses.
  7. If necessary make estimates of amounts, but estimate on the low side for income and on the high side for expenses.
  8. Review the forecast every month and adjust it for future months, as needed.
  9. Remember one of the main reasons for preparing a cash forecast is to influence your behaviour.  Update the forecast as you modify your behaviour.
  10. The forecast will indicate where your cash position is likely to be difficult. Take steps as soon as you see an indication of a cash flow challenge to avoid running out of cash or find a source of funds for any deficit.

Cash is the oxygen that a business needs to keep functioning. Taking the time to prepare a cash forecast will not only provide you with critical information about your future bank balance, it will also provide essential insights into your business processes that you might miss if you focus only on financial statements for your analysis.

Cash forecast example:  Akhra’s business – Years 2 and 3

Here are some ideas for when cash is a problem

  • Review each payment the business makes. Can it be reduced or delayed?
  • Many suppliers will agree to wait a little for payment if you explain your situation and perhaps offer to pay a little extra.
  • Look at your inventories and assets. Could any of them be sold quickly to free up some cash.
  • Can the business generate cash in other ways, eg. Renting out unused office or storage space.
  • Approach any customers who owe money and ask if they could pay sooner, perhaps by offering a discount.

Other related articles and tools:

  • The Cash flow Statement
  • Cash Flow Worksheet
  • Cash Flow Sensitivity Analysis Worksheet
  • Maximize your income and profits