Producing a cash flow is not difficult providing the
business already has reasonable bookkeeping or accounting
records. Manual accounts are fine although accounting
software is likely to produce the best information base
from which a cash flow forecast can be prepared.
There is not one specific format that a cash flow forecast
can take. Each business may require varying degrees of
accounting information and accounting cash flow templates
can be anything from a detailed list of all cash incomings
and outgoings to totals of the main elements.
In essence a cash flow forecast represents the anticipated
movement of the money coming in and flowing out of a
business. Larger businesses that use sophisticated
accounting software and employ accountants will already
have cash flow statements as part of the financial control
function.
Many small business organisations including those using
accounting software may have the technical ability to
produce a cash flow forecast but often either do not do so
or ignore the use of the liquidity forecast as an essential
business tool. Small business is the area most at risk
through ignorance of using a cash flow forecast.
A simple cash flow forecast would be a comparison of the
monthly movements in the working capital of a business by
comparing the movements in the current assets taken from
the balance sheet.
Preparing a cash flow statement based upon just the working
capital ignores fixed asset investments and financing of
the balance sheet of which a small business usually has
individual knowledge anyway. They are important issues and
can have a huge impact on business liquidity but the area
discussed in this article concerns mainly the working
capital cash flow forecast.
A working capital cash flow forecast is a comparison of the
current assets and current liabilities shown in the balance
sheet. Current assets include stock, debtors and the cash
or bank balance while current liabilities include creditors
and the bank balance if the business is in overdraft.
Start the template by listing these balances from the last
set of prepared accounts entering each account heading on a
different row. That provides a snapshot of the company
liquidity. Add into the forecast the annual sales and
annual purchases.
By dividing the debtors that is the sales income still owed
to the business into the sales turnover and multiplying by
365 the average number of days debtors are outstanding is
calculated.
On a similar basis by dividing the creditors which is the
total purchase expenditure owed by the business into the
total purchase expenditure and also multiplying by 365 the
average number of days creditors outstanding is calculated.
The next stage in the cash flow forecast would be to add
into the succeeding columns the forecast sales and
purchases for the periods for which the cash flow forecast
is being prepared. A monthly forecast would be suitable for
most businesses as it would only be on a monthly basis that
a balance sheet is prepared.
Having entered the forecast sales and expenditure it is
then necessary to split these figures over the forecast
months. Having forecast the monthly sales and expenditure
the cash flow forecast then needs to show when those sales
are expected to be received and when the purchases are
expected to be paid. This should be calculated using the
average number of days credit from the first set of actual
figures used when preparing the forecast.
A forecast is required of the likely stock levels taking
into account seasonal and strategic changes. The combined
increase or decrease in the debtors, stock, creditors and
also other fixed asset expenditure, taxes and dividend or
financing arrangements has to be calculated to produce a
forecast cash and bank balance.
On a separate row it would be useful to record under the
cash and bank balance the actual funding available which
typically would be the bank overdraft facility.
Having completed the initial working capital cash flow
forecast it should then be examined in detailed to
determine if the business has sufficient funding to
continue trading throughout the forecast period.
The real benefits of the cash flow forecast is not just to
compare the movements during the year but to update the
forecast by replacing the forecast figures with the actual
numbers so progress can be tracked.
The critical use of such a forecast would be to plan how
the forecast can be improved by increased stock control,
better credit control and extended supplier arrangements.
List each planned action and use the cash flow forecast to
monitor progress.
By monitoring progress the business is using the working
capital cash flow forecast as a business tool and will be
alerted to changes providing the critical early warning
signs of impending difficulties which will affect many
businesses during a credit crunch.
Businesses and small business in particular regularly has
periods of lower sales and low profits, even losses. These
can be withstood and overcome through the understanding of
the specific business and putting effort into the areas
requiring action.
Early warning signs of credit tightening and a plan of
action are critical to the survival of a business. Sales
and net profits determine how well a business does. Cash
flow and adequate working capital determines whether a
business survives.
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Terry Cartwright designs UK Accounting Software at
http://www.diyaccounting.co.uk/ on excel spreadsheets
providing complete Bookkeeping solutions
http://www.diyaccounting.co.uk/bookkeeping.htm for small to
medium sized businesses
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