Cash Flow Forecast

The cash flow forecast is one of the main accounting statements for business plan financials.

The cash flow forecast shows what cash was paid or received by the business during the accounting period. The accounting period can be any length but is usually a month or a year.

There are many cash flow forecast forms, the layout below acts as a quick reference, and sets out the most commonly encountered accounting terms when dealing with a business plan cash flow forecast.

Example: Basic Cash Flow Forecast
Net income 5,908 Net income from the income statement
Add back depreciation 14,000 Depreciation does not involve cash
Working capital -4,978 Movement in working capital
Operating activities 14,930 Cash flow from operating activities
Capital expenditure -50,000 Purchase of long term assets
Investing activities -50,000 Cash flow from investing activities
Debt repayments -16,500 Repayments on borrowings
New debt 46,000 Proceeds from new borrowings
New capital 5,000 Proceeds from new equity issues
Financing activities 34,500 Cash flow from financing activities
Net cash flow -570 Net cash flow for the period
Opening cash balance 966 Agrees to opening balance sheet
Closing cash balance 396 Agrees to closing balance sheet

As an example, the annual report for Apple shows a typical cash flow statement layout.

The Need to Understand the Cash Flow Forecast

The business plan financial section for most businesses tends to concentrate on the income statement and fails to get to grips with the cash flow forecast. Our financial projections template always includes the cash flow forecast template.

Cash flow forecasting is important for many reasons:

  • A business can continue for a period of time without profits but it cannot continue if the cash runs out. The cash flow forecast is used to ensure this does not happen.
  • If working capital (inventory plus accounts receivable less accounts payable) is growing as the business expands, management should use the cash flow forecast to make sure that the growth can be properly funded, with additional facilities if necessary (cash, overdraft, equity, loans etc).
  • Bank managers utilise the cash flow forecast, as they base their lending ratios on certain aspects of it to determine liquidity and the risk of non repayment of a loan. The bank needs to know that the business has sufficient cash flow from its operating activities to make loan and interest repayments.
  • Cash flow forecasts are used by investors to decide whether to invest or not and at what price. For example, they will look at the discounted free cash flow as one method to determine the valuation they place on the business.

Any number of people could be using your cash flow forecast to make decisions about your business. It is important that you have an understanding of what information the cash flow forecast is providing and what that information is telling you.

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