What is a cash flow forecast?

What is a cash flow forecast?

A cash flow forecast is a plan which sets out how much money a business expects to receive and how much it expects to spend over a certain period of time. It helps you understand how much cash you’re likely to need in the future and make informed decisions on that basis.

A misconception is that a cash flow forecast isn’t needed if you have a profit and loss account. That’s incorrect. The two are very different and will never match.

A profit and loss will tell you how much income has been earnt and how much expenditure has been incurred but it doesn’t necessarily mean that all of the income shown in the profit and loss is in the bank account, especially if you provide your customers with credit terms.

You may have already invoiced your customer (which will show in your profit and loss account straight away) but if the customer doesn’t pay you until six weeks later, you haven’t received the cash at the same time as handing the invoice to the customer, there’s a timing difference. This timing difference impacts your cash flow.

Every business should have a cash flow forecast, even small businesses can find a simple, visual cashflow forecast really valuable.

A cash flow forecast can help in the following ways:

  • plan for how much money you expect to receive from your customers
  • plan for how much money you expect to pay out in bills, tax etc
  • plan for any cash shortages or surpluses

Planning for expected and unexpected eventualities means you can adapt quickly. Perhaps you’re looking to recruit new staff or invest in new equipment but don’t know when the time will be right to commit. An accurate cash flow forecast will help you plan for when you can do this. If you’re aware of a bill VAT bill coming up, you can plan for the payment, and if you identify a cash shortage, you can plan how you’re going to bridge that gap.

If you’re looking to grow your business then an accurate cash flow forecast is critical. If you’re looking for investment or funding, lenders will expect to see a cash flow forecast before lending any cash.

Plan for the ‘what ifs’. Not even the greatest of accountants have a crystal ball so it’s important to plan for every scenario and build these into your cash flow forecast. Planning for multiple scenarios demonstrates to lenders that you’re able to adapt, make strategic decisions and avoid cash flow disasters.

We integrate the latest cash flow forecasting software into Xero, enabling us to help our clients plan for the cash future.

We populate a cash flow forecast, build in potential scenarios, pull in real-time actual results from Xero and then review what’s actually happened compared to what was expected to happen. We then support our clients in understanding the cash impact and work with them to make the right decisions to keep them on track going forward.