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Cash flow problems don't just happen! Here are three things you should know about cash flow forecasting

by , 17 April 2015
Most successful financial analysts in the field have a saying: "You could be bankrupting your business right now and not know it!". In other words, each action we take into present time can actually lead our business to a bankruptcy in two years, three years time!

And that's why it's your responsibility to keep updating your cash flow forecast, as part of your general company financial planning.

If you don't want to face a financial crisis in two years from now, here's how to do a proper cash flow forecasting:


Update your cash flow forecast monthly, the same way as you do for your budget!


Compare actual income received and expenses paid with your forecast. Make adjustments for unexpected amounts and amend your future forecast months as necessary. If you don't, the gap between your cash flow forecast and reality will grow wider each month. No-one can get a plan totally accurate so we make corrections as we learn more.

Keep in mind that if you're doing this in Excel or a similar program, constantly add one month to the end of your forecast as the current one ends, creating a rolling forecast.
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This means you constantly forecast 12 months ahead.

The advantage of doing this is if you only prepare a forecast once a year, the forecast period will get shorter after each month passes. So you have to forecast for the 12 months from March to February. At the end of March, your forecast period is 11 months, at the end of July your forecast period is seven months, at the end of December your forecast period is two months, By this this stage, it isn't much use.

However,  if you add one month to your forecast at the end of each month, you're always forecasting 12 months ahead, giving you lots of planning time.

Here are three points to remember about cash flow forecasting

1. Cash flow problems don't just happen. You have to understand that they're a while in coming and can be anticipated and prevented if you take the trouble to plan for them.

2. Don't use your bank account as your only source of information. Your bank account will only reveal what's been processed through the bank, not what has been committed and still need to be processed, such as outstanding cheques, debit orders, etc. Use your cash book.

3. You have a lot of money tied up in working capital cash (stock and receivables) – managing your working capital correctly can significantly improve your cash position.


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