Cashflow is the lifeblood of any business, and the aim of all business people is to increase positive cashflow (more money coming in than has to go out). Cashflow refers to the daily ebb and flow of money in and out of your business. Money comes in from sales, and money is paid out to meet bills and commitments. The difference between what you get in and what you pay out is the cash surplus (or shortfall) you have (or will need to find) to keep your business afloat: to pay rent, wages, replenish stock, etc.
Purpose of the cashflow forecast
Cashflow management is all about time: the timing of money coming in and money going out.
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Do you ever fall into overdraft by mistake and have to arrange a quick meeting with your Business Banking Manager?
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Have you ever had to ask for an overdraft to pay an 'unexpected' tax bill?
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The purpose of cashflow forecasting is to manage the gap between when the money comes in (if you have credit sales this could be one to two months - or even longer - after you've done the work) and when your bills are due. This is where the skill comes in. Your objective is to practise proactive rather than reactive management, in other words to anticipate cashflow challenges well in advance so that you can take timely steps to manage the situation.
The benefits of cashflow forecasting
Elements of the cashflow forecast
The cashflow forecast is essentially a table or spreadsheet that allows you to project ahead the cash receipts into your business and the cash payments out of your business.You'll see the cashflow forecast runs over 12 months and has three parts:
Cashflow in. This includes all the cash you think you'll get in any particular month. In addition to forecasting actual cash sales, you also have to take into account credit sales and estimate in which month you'll actually receive this. Remember, the cashflow forecast deals only with the cash you'll actually receive during each month. You're essentially trying to predict what your bank statement will look like each month. Note that under incoming cash you should also record loans received, funds introduced into the business by the owner or shareholders, and any wage subsidies received from Work and Income.
Cashflow out. This includes all the monthly expenses that drain actual cash out during that month. Again you're trying to get as close as possible to what the bank statement will look like. You should include drawings, GST and tax payments, any purchases of fixed assets, etc.
Calculating net cashflow. In the final short section the spreadsheet will automatically subtract cash in from cash out to give you your net cashflow. Once you enter your Opening bank balance for the first month (the balance at the start of that month) it will then show you what your Closing bank balance will be.