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Seven steps to do an effective cash flow forecast

by , 20 October 2014
You need to know where your company's going financially so you can take steps to take it in the right direction.

To do this, you need to do a cash flow forecast. This helps you predict where your company will go based on your company's previous finances.

Here's how to do your cash flow forecast in seven simple steps...


Follow these seven steps to do a cash flow forecast for your company

Step #1: Predict how much money you'll get each month
Remember that sales don't necessarily mean you have money. Many businesses give credit terms to their customers, which means they have sales, and probably profits, but not necessarily cash. 
Furthermore, borrowing money increases available cash, while repaying loans depletes cash. To determine what money will flow into your company each month and what will flow out, produce a cash flow forecast. 
Step #2: Predict how much money you'll pay out each month
In the same way you calculate money coming into your business from sales, calculate the money leaving your business (your expenses).
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Step #3: Record any other cash amounts you expect to come into your business 
Record any other cash you expect to come into your business. This includes:
Interest receivable;
Loans you expect to raise;
Proceeds from the sale of assets, etc.
Step #4: Record any other cash outflows 
List, for each month, the cash outflows that aren't part of your normal operations and aren't included in your budget. These include any loan repayments, asset purchases and provisional and expected assessed tax payments.
Step# 5: Ensure you know your cash balance at the beginning of the first month of your forecast
Establish your cash balance at the beginning of the first month of your forecast. The opening cash balance in your cash flow forecast will come from your cash book. 
Step #6: Put your cash flow forecast together
Take your cash inflow from trading (Step #1) and deduct your cash outflows (Step #2). This will give you the cash actually generated by your business.
Add in any other cash inflows and deduct other cash outflows (Steps #3 and #4). Finally, include your opening cash balance (step#5) and calculate the cash balance at the end of the month. It becomes your opening bank balance the next month.
Step #7: Keep updating your cash flow forecast
Update your cash flow forecast monthly, the same way you do 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 do this, the gap between your cash flow forecast and reality will grow wider each month. No-one can get a plan totally accurate so make corrections as you learn more.
It's easy to predict your company's future cash flow with this easy seven step forecast. Do yours today.

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