Forecast monthly cash flow
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Monthly forecasts of cash flow are fundamental to your business.
Depending on your type of business, you are unlikely to be able to raise
investment or develop a good relationship with your bank without an accurate
assessment. It is generally recommended that all new businesses should prepare a
monthly cash flow forecast for the first year and an annual forecast for the
first five years of business operations. There are other benefits of forecasting your monthly cash
flow: - An accurate monthly cash flow forecast will allow you to get a
clear idea of how your business is doing - and how it is likely to perform in
the future
- You will be able to specify times when your business may need
additional funding, such as when cash outflow exceeds inflow
- Inconsistencies in performance can be identified, predicted and
remedied
- Major new investments can be bedded in and accurately
assessed
Construct a cash flow statementYou will need
to gather bank statements including all cash and deposit accounts and any cash
at hand. You can then be clear on your 'starting position'.ADD: Cash inIn the appropriate month
enter:- Sales made, for which you're awaiting payment - include the VAT
amount
- Other incoming amounts (eg rent payments etc)
- Forecast the sales you will make in future months. Note the
cash amount you expect to receive.
LESS: Cash outYou will be aware of the routine
expenses from your budget. Consider the cash elements of payments rather than
the charge against profits and also the areas in which there may be timing
differences (ie a difference between the time a bill is due and the time it's
actually paid), include rent, payroll, VAT and creditor payments.Calculate the cashflowYou now have the
information to complete the calculations. Start with the opening balance, add
the incoming cash and subtract the outgoing cash. The balance at the end of the
month becomes the opening balance for the following month.Accountancy softwareIf you want to use
software to calculate your monthly forecasts, make sure you purchase a system
that is simple to use, compatible with your existing systems and secure. Using software will take much of the tedium out of forecasting, but
it doesn't relieve you of the need to gather information. All computer packages
depend on the quality of information inputted, so false assumptions and wrong
figures have got to be guarded against. These errors can be easy to make - and
difficult to identify.
Also, remember that whether you are using a computer or performing
the assessment manually you are considering cash transactions only - you are
not looking at promissory notes, invoices despatched and received etc.
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