A cashflow forecast is a very useful tool that helps business owners plan for the rises and falls in their cash availability. A cashflow forecast will help business owners measure and manage the timing of payments and receipts to ensure that they have sufficient cash available to meet their business needs.

A business cannot survive without having any money flowing into its revenue stream. The amount of cash flow a business has will have a huge impact on the longevity and performance of a business. Many businesses that fail often cite poor cash flow management as one of the reasons for that contribute to their demise.

Underestimating the value of cash flow forecasting can significantly weaken the stability of a business, so it is therefore crucial to understand from the outset how a cash flow model works and why you need to undertake one.

Tyler Bisgrove from Vault Accountants asserts that there are a number of important steps required to ensure that you undertake a cashflow forecast in the most effective manner possible.

“It’s essential that you have a “clean” data file, so that we can trust the historical data to use this as a platform to project forward cash movements. Having an understanding of repetitive payments, patterns in income and patterns where lots of expenses are due out together are easy to find when you have a good, well managed accounting system in place,” says Tyler Bisgrove from Vault Accountants.

A cash flow forecast plays a vital role in helping a business plan for the future. A good cash flow forecast model estimates a business’s future financial position and helps ensure that it will have the necessary amount of cash to meet future obligations and better manage working capital.

Key financial reports such as an income statement (or profit and loss statement) only looks at sales and expense activity, while a balance sheet reports on assets, liabilities or contributions of equity.

Business owners make difficult financial decisions every day. Cash flow forecasting is a crucial part of a business’s planning process for a number of important reasons, and can help relieve the burden of cash flow management.

Cash flow modelling also has many benefits because it allows businesses to plan for the future, as well as potential market fluctuations, and even an economic recession.

“The benefits of undertaking a cashflow forecast are huge and multiple. Planning for “rainy days” strategizing the cost of growing your business or just having a clear understanding of how the money moves through your business will help you make some really fundamental and big picture business decisions,” says Tyler Bisgrove.

“On the other hand, not having a handle on your business finances or cashflow can have a huge negative impact. Poor cashflow is the most common cause for a business to fail. Given the volatile world we now live in, it’s imperative we know where are at so we can adapt and change as needs require,” continued Tyler Bisgrove.

Despite the many benefits associated with undertaking a cashflow forecast, Tyler Bisgrove says that there are a number of expenses involved in a cashflow forecast that are the most difficult to predict or calculate.

“Anything that’s ad hoc or unplanned is difficult to predict. “General Expenses” is the worst kind of expense code. “General” doesn’t mean anything, and it makes it almost impossible to plan or budget for this expenditure. Everything should be planned for and you should have a valid business reason to justify all expenses. “Entertainment” is another huge grey area. It’s usually not tax deductible, it’s a nice to have but it’s not usually essential for the business,” says Tyler Bisgrove.