Cash Flow Forecast
A cash flow forecast is simply a record of when you expect to take cash in and when you have to pay it out. It is important because it tells you if you will be paying out more than you will receive in a particular period and highlights any potential cash flow crisis. Knowing where a possible problem is looming allows for arrangements such as an overdraft or a short-term loan to be put place.
Cash flows from one period to the next can be very different, with inflows in one month turning into an outflow the following. A common issue is the timing of VAT payments to Revenue and Customs. It is usual for payments to be made quarterly, for VAT collected on a monthly basis, so expect a larger cash outflow in one month compared to the other two. It may be your business is cyclical, such as a bed and breakfast business in a summer holiday area. The income is concentrated into a few summer months but property maintenance and utility costs continue throughout the year. Good cash flow planning is required in this case.
The diagram below graphically identifies the major cash flow items for most UK businesses.
Inflow Items
For a business, sales receipts are the prime source of cash inflows. However additional cash may come from interest receipts, sales of assets, and a cash injection from the owners or the cash from the arrangement of a loan to the business.
Remember of course that if you offer credit terms to your customers, that your incoming cash flow will be delayed by the credit terms you offer. Some businesses in the UK have to cope with customers taking 60 to 90 days of credit. It is good practice to make it very clear to your customers the terms, on which you make your sales to them.
Outflow Items
In essence covers everything relating to business expenditures. Paying salaries and suppliers for goods and services are obvious ones. But there may be the need to buy assets for the business (machinery, computer equipment, furniture etc), make loan or lease repayments, and make interest payments on loans and pay over VAT and other taxes to Government.
Just as your customers may enjoy credit terms from you, then you may be able to agree credit terms for your purchases. Try whenever possible to negotiate favourable terms in advance rather then just accept your supplier’s terms. Ensure you stick to the agreed terms, as there is now legislation in place to allow suppliers to recover costs and penalties when terms are not adhered to.
The following web site provides more information on the whole issue of late payments. www.payontime.co.uk/
Cash Flow Forecast Layout
An initial pro-forma layout for a cash flow forecast is available in this downloadable pdf file or as an Excel spreadsheet
