An introduction to cash flow forecasting

Cash flow forecasting is the lifeblood of early stage and high-growth companies. Typically, the profile of these businesses will mean that they are not yet profit-generating, and in some instances may be pursuing a strategy of growing their top line revenues in place of being focused on their profitability.

As such, they will live or die by being able to have enough cash in the bank. Creating and maintaining a cash flow forecast will allow businesses to better plan for short-term funding gaps, alongside being able to prepare for equity raises before they run out of cash.

What is the difference between a cash flow budget and forecasts? 

Despite their name inferring that they only contain expenses, budgets commonly include sales activity as well as expenditure transactions.

Budgets are typically prepared prior to a company’s financial year and tend to present a list of goals the business wants to achieve over the subsequent 12 months.

Forecasts differ in that they will take into consideration actual business activity in the year to date. For example, if a company has a fiscal year end starting in January and ending in December, they may create a forecast measuring the period from April to December, which is partly prepared with reference to the actual activity from the first quarter.

Based on their consideration of actual activity, forecasts tend to be more achievable and grounded, in reality, than budgets which in retrospect can come across as being optimistic.

How often should cash flow forecasts be created?

New iterations of forecasts are referred to as reforecasts. It is common for businesses to reforecast on a quarterly basis, flexing figures based on the variance between actual and forecast activity from the previous three months.

However, if the cash position of a company is particularly tight they may reforecast on a monthly, weekly or even daily basis.

How should forecasts be used?

Forecasts are most commonly used by the senior management team and departmental owners. Making departmental owners responsible for subsections of forecasts related to them makes them more accountable.

Additionally, departmental owners should be consulted when forecasts are put together as they are likely to have insights into the financial and operational elements of their respective areas of the business.

It is good practice to incorporate forecasts into monthly management packs. This will allow comparison of monthly actuals to forecasts. You may want to compare the monthly actual activity to forecasts to show variances, alongside producing a 12-month view taking into account actuals to date alongside forecast data through to the end of the year.

Why Cloud accounting?

Whilst forecasts are normally created in Excel, there are huge benefits to transferring them to the Cloud.

Cloud accounting software such as Xero allows business owners to upload budgets from Excel, whilst cash flow forecasting tools like FUTRLI either have the facility to build forecasts within their software or to upload Excel templates.

The benefits of using cloud software to manage forecasts is that there is less chance of making a manual error, alongside time-saving benefits of not having to edit data by blending actuals and forecasts manually.

Additionally, cash flow forecasting tools like FUTRLI connect directly to most cloud accounting software packages making this process even easier.

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This article was originally published by Propel by Deloitte with our friends at AccountingWEB.co.uk here.