Articles on cash flow and working capital for business
How you estimate future cash flows is to begin with your business’s cash at the start of your cash flow forecast period. Next you need to estimate your incoming cash for each month of the forecast period. Which is followed by estimating expenses for each month of the same period. Then add the estimated income to the opening balance figure, then deduct the estimated expenses, which will give you your future cash flow balance.
Cash flow software with assets and liabilities functionality will include these on the forecast balance sheet. Which means that whilst the cash flow reports take account of the incoming cash and outgoing expenditure, the closing assets (for example your cash balance, amounts owed by customers, inventories or stock, other debtors and prepayments and fixed assets) and closing liabilities (for example, amounts owed to suppliers, amounts owed in VAT and tax, accruals, other creditors and loans) will be on the balance sheet report at the end of each month or period.
Whether you like it or not, cash flow forecasting is a vital part of the decision making process for any business. Using cash flow forecasts in conjunction with a business plan provides for better decision making and helps with planning for growth. Planning for the future helps to remove some of the risks associated with running a business. Whilst it’s impossible to predict the future with certainty, by preparing forecasts at least prepares you for most eventualities.
The main disadvantages of focusing on improving cash flow includes the potential reputational damage. By having a cash-only focus rather than a customer-based focus is very short-term. You may end up alienating your customers and lose out on customer advocacy and the benefits this could bring in the long term. This is not to mention the specific costs associated with some solutions to improving cash flow like invoice factoring costs.
Due to the complications involved with preparing cash flow forecasts for VAT registered businesses, it makes sense to use cash flow software built with VAT. Whilst it’s okay to prepare a cash flow forecast from scratch using Excel spreadsheets, it takes time to work out the figures to be include on the cash flow report (i.e. including VAT), vs those on the forecast profit and loss report (i.e. net of VAT).
How you include cash and cash equivalents in your cash flow forecasts is relatively straightforward when it comes to cash. But with regards to cash equivalents, you need to take account of the maturity date for each cash equivalent. Your cash flow forecast needs to allow for when the cash equivalent can be converted into immediate cash, as and when it may be needed in the future. It is then the closing balance of both the cash and cash equivalents that you include on your forecast balance sheet at the end of each month or at the year end for your forecast period.