Cash Flow Forecast

(Reference : This is the text of some notes I wrote for a course for the Wales European Funding Office)

"Cash Flow Forecast" is one of those phrases used frequently in business, without thinking.  The words cash, flow and forecast are all equally important and point to a different aspect of the exercise.

Cash is not an accounting exercise.  Some things have a material effect on the viability without ever appearing in the accounts.  VAT is a prime example.

Some things do not belong in the cash flow, such as depreciation, and reserves set aside.

The figures represent cash - when it goes in and out and not when it is supposed to go in and out.  Invoices for example, may not get paid for 2 or 3 months.

It is not a budget.  A budget is a sum of money set aside and divided up into months perhaps, or some other useful period.

It is a forecast.  It represents what we think now at the start, with our best educated estimate of what is going to happen for the next year or two.

A one year forecast is very useful.  Two years may be useful to show a longer term breakeven estimate.  Three years is probably guesswork extrapolation and five years is very unreliable indeed.

The forecast should be done at the beginning and again after 3-6 months. That way you always have an up to date best estimate for the next year or so.  It is no good waiting until the end of year one and then deciding it was inaccurate.  Its value deteriorates quickly and needs frequent revision in the light of present knowledge.

It is a planning tool.  It is much better to get it wrong on paper and show it does not work rather than to do so in reality.

As long as it has not provided unrealistic figures, it can show how many sales or what income is required to support a level of expenditure.  It can show what a particular level of income can allow us to spend.

It is a very useful tool!