HOW TO MAKE AN ACCURATE CASH FLOW FORECAST?
WHAT IS THE CASH FLOW FORECAST?
WHY IS CASH FLOWS FORECAST IMPORTANT?
The cash flow forecast will also help you track how quickly your customers are paying their invoices. Always remember that as a wholesale business you get the most of your profits from orders, so timely payment is important.
HOW TO PREPARE A CASH FLOW FORECAST ?
Creating the basic cash flow forecast will take several hours, and then updated by one more hour each week.
It depends on your ability to use the Excel program, or your willingness to spend your money on purchasing one of the many cash flow forecasting applications available.
There are 5 steps in making a cash flow forecast:
Step 1: Prepare a List of Assumptions
Assumptions can be based on industry publications, correspondence from customers and suppliers, past performance, etc. And generally include:
- Time and price increase quantum - both yours and your suppliers
- Estimates sales growth
- Season impact
- Allowance for general cost increases
- Allowances for internal wages and wage increases
Step 2: Prepare Anticipated
Sales Revenue Sales can be difficult to predict, and often the best place to start is to look at past years of sales to identify trends. You can then identify internal (eg price increases) and external (eg economic) factors that may be affecting the current period, and make adjustments as necessary.
When you have determined realistic sales for the period, they will need to be broken down into sales receipts (eg when is cash expected to be collected from debtors?). Often there is a pattern in debtor's remittances (eg 60% in term, 25% one month out of terms with the remainder coming soon after). Note: this pattern should form one of the assumptions on which the forecast is based.
Step 3: Prepare an forecastd List of 'Other' Cash Inflows
To ensure your cash flow forecast is complete, list all other anticipated cash inflows, for example:
- Insurance proceeds
- Additional equity contributions or loan proceeds
- Government grant receipts
- Cash from asset divestments
- Royalties or franchise / license fees
Step 4: Prepare a List of forecastd Costs
This should include both direct and indirect costs. The key is to identify all the costs required to run the business and anticipate the timing of each payment. Cash outflows related to financing and investing activities should be included, for example:
- Payments to suppliers
- Wages and salaries of all staff
- Purchases of new assets
- Loan payments
- Director's drawings
Bank statements are an easy way to identify direct debit arrangements.
Step 5: Putting the Information Together
Simply put, cash flow forecast is a rolling calculation based on the opening cash position, adding cash inflows and subtracting cash outflows, to arrive at the closing cash position. Finally, it is a good idea to run some 'what-if' scenarios on the finished forecast for determining how much capacity your business has in the face of an unexpected event.
Cash flow forecasts allow a business to track expected cash movements over a future period of time. In general, when it comes to their expected future profits and losses, business owners tend to know their business inside out. They know what margin they will make for each product or service they offer, and have a good understanding of their overhead costs.
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