Business Library

Forecast annual cashflow

Forecasting your annual cash flow is one of the most demanding tasks you will undertake in your business, and one of the most important as it will form a key part of your business planning.

Before securing a bank loan or approaching others for investment you will need to present an annual cash flow forecast. Cash flow forecasting involves tabulating all significant cash inflows relating to sales, new loans, interest received. Then analysing in detail the timing of expected payments relating to suppliers, wages, capital expenditure, loan repayments, dividends, tax interest and so on.

The difference between the cash in- and out-flows within a given period indicates the net cash flow. If this net cash flow is added to or subtracted from opening bank balances any likely bank funding requirements can be ascertained. To forecast your annual cash flow you will need to:

Identify all in-going payments, these include receipts from sales, increases in bank loans, proceeds of share issues, returns from asset disposals and interest earned
Identify all out-goings; include payments to suppliers and staff, capital and interest payments for loans, dividends, taxation and capital expenditure
Use the following equation which should give you a figure for the year: Starting Cash Balance + Projected Cash Inflows - Projected Cash Outflows = the ending cash balance or project cash flow

Remember you are only dealing with cash business, not with invoices dispatched or received or promissory notes.

Using a computer

With the aid of a computer and suitable software, a mathematical model can be used to prepare cash-flow projections and project banking requirements for a business. The use of a computer-based model reduces the tedium of carrying out numerous repetitive calculations and simplifies the alteration of assumptions and the presentation of results.

A computer-based package can be constructed using a spreadsheet or acquired as a stand-alone package. If you decide to construct a spreadsheet model, be aware that it is not as easy as it might seem to build a friendly, robust and error-free planner.

Action Checklist:

Unless you are very qualified it would probably be best to buy an accounting package off-the-shelf. If you elect to do this make sure that:
the package is compatible with your current systems
you can adequate support if you need assistance
ask around to find out what packages you colleagues are using.

Many small businesses use a Factoring Service to ensure healthy cash flow. To request a no obligation quote click here, or find out more with our Buying Guide.

This is a guide. It may be helpful for you to speak to an advisor in commercial finance and accounting. E&OE