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What is a Cash Flow Forecast?

Cash flow forecasting plays an important role in managing business finances. Forecasts can be used to predict difficult financial periods ahead of time, giving your business the opportunity to make preparations to lessen their impact. Additionally, businesses can use cash flow forecasts to visualise the effect of an investment on future cash flows to see if they are financially viable. 

Managing your cash flow is vitally important to supporting the growth of your eCommerce business. Poorly managed cash flow is one of the leading causes of small businesses failing in their first few years of operation. 

 

Cash Flow Forecast - Definition

 

A cash flow forecast is a document that allows businesses to estimate the amount of money that will be moving in and out of the business based on anticipated revenue and expenses over a given period of time. Cash flow forecasts are not a reflection of a business’s Profit and Loss Statement, as profit offers a different financial view of the business. Profit is the amount of money left over after all business expenses are accounted for, while cash flow is a snapshot of money coming into and going out of a business over a set period of time. 

Below is an example of a basic cash flow forecast. From this is it clear that this example business will experience negative cash flow in the month of June, based on these predictions. Being aware of periods when your business may experience, or is more likely to experience, negative cash flow can allow you time to prepare and manage the potential implications


   

JAN

FEB

MARCH

APR

MAY

TOTAL

Cash Income

 

 

 

 

 

 

Investments

20,000

 

 

 

 

20,000

Sales

3,000

7,000

7,000

7,000

7,000

31,000

TOTAL INCOME

23,000

7,000

7,000

7,000

7,000

51,000

 

 

 

 

 

 

 

Cash Outgoings

 

 

 

 

 

 

Materials

2,000

2,000

2,000

2,000

2,000

8,000

Marketing (Google Adwords, Facebook Ads, etc)

500

500

500

500

500

2,500

Legal & Accounting

2,200

0

0

0

2,200

4,400

Salaries

2,000

2,000

2,000

2,000

2,000

8,000

Other costs

500

500

500

500

500

2,500

eCommerce Platform Fees

80

80

80

80

80

XXX

TOTAL OUTGOINGS

7,280

5,080

5,080

5,080

7,280

29,480

 

 

 

 

 

 

 

Net Cash Flow

15,720

1,920

1,920

1,920

-280

21,200

Opening Balance

0

15,720

17,640

19,560

21,480

 

Closing Balance

15,720

17,640

19,560

21,480

21,200

 
             

Fig 1.

 

The Importance of Forecasting Cash Flow

Cash flow forecasts are primarily used to help businesses manage and plan how much cash they will need to continue with operations in the future. Cash flow forecasts also have a host of other benefits for eCommerce businesses such as; 

  • Anticipating cash shortages.

Understanding when your eCommerce business might experience periods of negative cash flow can give you the opportunity to plan ahead, adapting revenue streams, reducing costs or saving money to help reduce the impact of cash shortages.  

  • Tracking spending.

By creating a cash flow forecast, you can map out your business outgoings and create a picture of business expenditure on different processes. This can also allow you to see what can be cut back to improve cash flow, and even potentially profitability, in the long term.

  • More informed business planning.

Cash flow forecasts can be used to ‘play out’ the financial repercussions of business decisions and changes, allowing for more financially informed business decisions.

Understanding of best and worst case business scenarios.

Your business can also use its cash flow forecast to understand your best and worst case cash scenarios. From this you can create an informed strategy to help your business cope with difficult times.

  • Manage seasonal fluctuations.

Most businesses will experience a degree of seasonal fluctuations in revenue from sales, such as around the Christmas period. eCommerce businesses are also subject to seasonal fluctuations in revenue from shopping events such as Black Friday and Cyber Monday. While these shopping days are likely to boost your business’s income for that period, they may also require greater marketing expenses and expenditure on your website performance to cope with the demand, in the period preceding these shopping days. This could impact your cash flow, so using a cash flow forecast could be invaluable to help your business maximize its revenue from these shoppings days while keeping your cash flow under control. 

  • Informed budgeting.

Understanding your business cash income and outgoings over a given period of time can also help you to create more informed budgets and avoid jeopardizing your cash flow with large or unmanageable expenses.

  • Creating revenue goals.

Laying out your business income and expenses for future periods can also allow you to create informed revenue goals that ensure that all of your costs can be adequately covered. 

 

How To Create A Cash Flow Forecast

There are three key elements to creating a cash flow forecast. 

  • Projected sales

Create an estimate of the expected revenue from sales for your cash flow forecast period. If you are an established business, take a look at your sales history taking into account any seasonality to create a more accurate forecast. If you are a new business, you can estimate your sales using information from industry experts or competitors. Be sure to take into account any common payment delays that you experience that could cause some sales revenue to arrive into your accounts in the following periods. 

  • Other cash income

Sales might not be the only source of cash inflows into your business. If you are expecting income from a tax refund, investment, insurance payout, or grant, for example, be sure to include these in your forecasts for more accurate cash flow projections.

  • Projected outgoings

In a similar way to mapping out projected sales, you will need to take into account your expected outgoings for your forecast period. Look at previous expenses and see when certain bills need to be paid by, also identify any bills that are paid on a less regular basis such as quarterly or yearly to avoid overestimating your net cash flow for these periods.

Before you start to calculate your cash flow forecasts, you will need to determine which method of calculating cash flow would be most useful for your business. Direct cash flow is the more ‘traditional’ method of calculating cash flow, creating a cash flow statement, you will need to simply subtract cash outflows from your cash inflows (both highlighted in the example statement below - fig.2) to get your net cash flow.

If using the indirect method, you will instead need to look at your Profit and Loss Statement (fig.3). Taking the net income figure from this statement, you will need to make adjustments based on any cash expenses that are excluded from your Profit and Loss statement, as well as any non-cash expenses that are included to get your net cash flow. This method is particularly useful if your business deals with a high volume of transactions in a given period, but it will produce a less accurate forecast. 

For detailed business planning, it is recommended that you take the time to use the direct method as this gives you a more accurate picture of your cash flow.

Revenue

 

 

 

Sales

150,000

Cost of Goods Sold

 

45,000

 

Gross Profit

 

105,000

 

 

 

Expenses

eCommerce platform fees

200

 

Advertising

3,400

 

Insurance

2,500

 

Supplies

1,000

 

Payroll

7,000

 

Total Operating Expenses

14,100

 

 

90,900

Net Operating Income

 

 

Other Income

 

 

 

Investment

5,000

 

Total Other Income

5,000

Other Expenses

 

 

 

Depreciation

200

 

Total Other Expenses

200

Net Income (before tax)

 

95,700

Less Income Tax

 

(4,875)

Profit/Loss

 

90,825

Fig 2.

 

Conclusion

Cash flow forecasts can be valuable tools for business, helping to manage expected cash flow as well as create more informed business decisions and gain a greater understanding of expenses. Cash flow forecasting can be adopted by any business, regardless of size or industry. To get started with cash flow and understand more about managing cash flow, calculating it and mitigating negative cash flow, download our eBook chapters today.

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