Cash Flow Forecast - A Five Step Guide (2024)

Now that we have discussed the increased need for businesses to rethink their budgets, we’re going to dive deeper into how exactly to do so. To recap briefly, as businesses get a double hit from delayed payments and higher costs due to taxes and inflation, cash shortages loom larger and if unaddressed can become impossible to overcome. But there’s a place to start bridging this gap. Enter the cash flow forecast or cash budget. You can set yourself up with one in five simple steps:

1. Decide your planning period
2. Establish your beginning cash position
3. List all the sources of cash you expect to receive
4. List all the cash payments you expect to make
5. Put together all the above information in a cash flow template

Step 1: Decide your planning period

There are two questions that you need to answer here. First is the planning interval. Is it weekly or monthly? And the second question is how far ahead you want to project.

Remember that the further ahead you project, the less accurate your predictions become. Hence our recommendation that you start with a period of not more than 6 months.

Step 2: Establish your beginning cash position

This is determining how much cash you are starting with. It includes cash at hand, cash at bank and other near cash assets such as call deposits, etc.

Step 3: List all the sources of cash you expect to receive

These normally include:

• Cash sales
• Payments from customers that you sell to on credit
• Cash injection by the owner
• Cash from borrowings such as a bank loan
• Repayments from monies that you have loaned out
• Cash received from sale of assets

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Ben Rendle FCMA 3 years ago

Do not confuse sales with cash inflow. If you sell on credit and your customers pay you after 30 days, then a sale in month 1 becomes cash in month 2.

Step 4: List all the cash payments you expect to make

These are mainly your business purchases and expenses and include:

• Purchase of goods or raw materials
• Salaries and wages
• Rent
• Motor vehicle running expenses
• Trading Licenses
• Office expenses
• Taxes etc

There are also other non-trading cash payments which one needs to take into account such as:

• Loan repayments
• Buying an asset such as a motor vehicle
• Cash drawings by the owner

If any of the above are acquired on credit, the cash outflow is only recorded in the month or period that the payment is actually made.

Step 5: Put together all the above information in a cash flow template

Most of the work is now done and all that remains is to put all the above information into a template. This is best done using an excel spreadsheet though it can also be done manually.

Note

If you have a good accounting system, data from previous periods can be very useful in making your predictions.

Got any questions? We’re here to answer. Email info@mgkfoundation.or.ke or just leave a comment or message.