Cashflow forecasts and liquidity

Cash Flow Forecasting – as the name suggests it is a projection of the flow of cash over a period of time, usually on a monthly basis and covers a twelve-month period. It is a summary of cash banked, payments made, and the resultant effect on your bank balance. A business may be profitable, but have no money to pay its creditors. Profits don’t pay bills; cash does, so understanding where your working capital is at any particular time is very important.

Banks will ask a business for Cash Flow Forecasts to establish overdraft requirements and demonstrate debt-servicing ability. A large portion of business owners will give this task to their accountants to do, which is fine, but it is not a difficult job and having the management of the company complete their own cash flow forecast has a lot of advantages, namely:
· Saves business money
· Management understand and has ownership of the figures
· Enables better control from understanding
· Enables easier comparisons between actuals and projections
· It allows management to identify adverse trends and apply corrective action

When would you do a Cash Flow Forecast? You should do one annually as a matter of course and review it frequently, but other triggers would be:
· Requesting borrowing or increased lending from your financier
· Starting up a business
· Buying a business
· Major sales growth
· Capital restructure/repayment
· Major asset purchase

How do I do one? You will have to had completed your Profit and Loss monthly projections first as a significant portion of this information will be mapped across to the Cash Flow Forecast (CFF). You will also have to had cleared the dust off your crystal ball to do this Profit and Loss, and have made some assumptions (It is important that you outline your assumptions and record them as an attachment to your forecast, these assumptions and the rational behind them will help provide credibility to any one you provide your forecast to). You need to consider:
· Any borrowing, repayments, interest rates (and likely movement if floating)
· Seasonal trends, if applicable
· Past monthly Profit and Loss and CFF actuals
· Purchasing schedule and payment timing
· Debtor collection period, factoring in your terms of trade you have allowed
· Creditor payment terms you have arranged with your suppliers
· Capital expenditure plans
· Historical information on your industry and its likely effect on your business

Completing a CFF allows you to understand the dynamics of your business cash flow and business money, and allows you to ensure your liquidity is sufficient to meet your anticipated commitments when they are due.

Liquidity (cash) is the lifeblood of your business and without it your business would stall and probably die, just as you would if your blood stopped flowing.

Some Tips – If you have been trading for a while you can use your bank statements to extract your historical cash flows. By understanding your historical information you will be better prepared to complete the projections. I recommend to my clients that they maintain separate accounts for their business and personal income and expenses, especially when trading as a sole trader. Business statements should also be cycled for printing the last day of each month. These will help you in preparing your CFF.

This article has been supplied by David Weusten from Financial Service Providers (

For information and advice on securing business finance.


Published on Monday, May 13th, 2013, under Latest News