No matter the size or age of your business, cash flow forecasting and budgeting is key to its success. Here Are Seven Don’ts For Setting Up Your Business Cash Flow Forecast:
1. Don’t bank on cash inflow too early. It can put you at risk
For cash inflows, do not underestimate the difference between the accounting income (when the revenue is invoices) and the actual cash flow. Depending on debtors terms, although a “sale” was made in month one, the payment (aka cash flow) might only be 30 or 60 days later. In the case of contracts with varying payment terms, take note of the difference between when the accounting revenue is recognised and when cash flow takes place.
2. Don’t group income streams.
Most businesses have various revenue streams. Split each stream into a separate line item, using unique assumptions for each one.
3. Don’t confuse accounting items for cash in the bank.
The golden rule is to only use actual cash for outflows in your forecast. Accounting items like depreciation and revaluations form part of accounting profit and loss, but are not cash in nature. They are therefore excluded. Opportunity cost is also not included as it is not cash flow in nature
4. Don’t guestimate your assumptions.
Assumptions should not be guess work. All line items in your cash flow forecast must be properly grounded using reasonable assumptions.
5. Don’t overestimate inflows and underestimate outflows.
Be prudent when setting up your forecast. You want your end product to be a realistic representation of expected cash flow.
6. Don’t under-report
Inflows and outflows that are not income statement items (income or expenses) also need to be included. Purchase of assets is not an expense, but it is an outflow.
Similarly, the receipt of funds from an investor or lender is not income in the income statement, but does lead to a cash inflow. It is here where the major difference between an income statement and a cash flow model lies.
7. Don’t be negligent
It is critical to be thorough. Details like the cash flow effect of tax, bi-monthly VAT and other non-general expenses can have a big effect on available cash.