What is a cash flow forecast?
A cash flow forecast allows small business owners to monitor incoming and outgoing funds, as well as anticipate future cash flow patterns over a specific duration. This report aids in gaining a comprehensive understanding of the business, identifying trends, and preparing for potential borrowing needs.
Furthermore, it provides detailed insight into how sales, purchases, and other daily operational expenses, no matter how small, impact the business’s bank balance.
By consistently practicing cash flow management, you can stay informed about the current financial resources available to keep your business operational.
Preparing a three-way cash flow forecast
Three-way forecasting integrates profit and loss, balance sheet, and cash flow data to provide a comprehensive overview of your financial position. By combining assets, expenses, and cash flow figures, you can generate financial forecasts that outline the potential of your business model, which is precisely what banks or investors seek when financial assistance is required.
Now, let’s delve into how cash flow interacts with your profit and loss statement and balance sheet, and explore how you can optimize financial forecasting and future planning by leveraging the insights derived from all three reports.
Understanding your profit & loss (P&L)
The profit and loss statement (P&L) provides an overview of your company’s revenue, costs, and expenses during a specific period, indicating whether your business is profitable or not. However, when your company sells multiple products with varying turnaround times, it becomes challenging to determine the exact amount of available cash at any given time. The inclusion of wages, payroll, VAT, corporation tax payments, and other overheads further complicates the situation.
Why cash flow management is important – an example
