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

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.

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.