As individuals, we can often “muddle through” if we run out of cash in a month \u2013 we quickly arrange a bank loan or overdraft, or put purchases on a credit card.<\/p>
But the same doesn’t apply for businesses, which often struggle \u2013 partly because the amounts of money involved are usually much larger, and partly because it’s often difficult to raise a lot of money quickly.<\/p>
Cash is the lifeblood of most businesses. It’s the money that you have easy access to, and that you use to pay staff, tax authorities, and suppliers. If your business doesn’t have enough cash to pay these people, it may fail within only a few days.<\/p>
To keep your business healthy, you need to understand how much cash will be coming into it, and ensure that your outgoings are comfortably lower than these cash incomings. Cash flow forecasts (also known as projections) help you do this. They help you make informed decisions about the future of your business, and proactively arrange finance, where this is necessary.<\/p>
In this article, we’ll look at how to forecast cash flows using a spreadsheet.<\/p>
This article is intended to help non-financial managers understand cash flow forecasts. Where you are relying on cash flow forecasts for business purposes, ensure that they are prepared by appropriately qualified finance professionals.<\/p><\/div><\/div>\n\n
Cash moves in and out of a business in three ways:<\/p>
Cash flow forecasts show how you can expect cash to move through your business in these ways.<\/p>
With a cash flow forecast, you can:<\/p>
Cash flow forecasts record money flowing in and out of your business or project over a number of periods of time.<\/p>
They will not show your reported income, as this is affected by wider factors such as depreciation (how the cost of an asset is allocated by accountants) and amortization (where large payments are spread over several periods of time).<\/p>
To learn the basics of financial reporting, and to understand more about financial terminology, read our articles on Understanding Accounts: Basic Finance for Non-Financial Managers<\/a> and Words Used In Financial Accounting<\/a>.<\/p><\/div><\/div>\n\n The steps below show how to set up and fill in a projection spreadsheet.<\/p> We’ve based our example on a small, fictitious restaurant called “Dinner’s On Us.” We’ve imagined that the managers rent a one-story premises for the restaurant. They have invested $5,000 of their own capital in the business, and they have also received a $2,000 bank loan at the start of the calendar year to finance the purchase of new kitchen equipment.<\/p> In our example, at the start of the new calendar year the owners launched a new service, delivering lunch platters to local businesses for meetings and corporate events. They bought a van for these deliveries, with the aim of covering its costs within six months.<\/p> Follow the steps below to set up your own cash flow forecast spreadsheet, using our example as a guide.<\/p>\n\n Use the columns of your spreadsheet to show the time periods over which your forecast will run. Typically, you’ll use a column for each month.<\/p> Enter the names of these months at the top of each column. (Leave the first column blank, as you will use this for the row labels \u2013 see step 2.)<\/p> It’s good practice to use a title for your spreadsheet that includes the period for which you’re forecasting, and to make a note of the currency you’re using.<\/p> Our example runs for six months; however, most cash flow forecasts run over a longer period \u2013 often one, two or three years.<\/p> <\/p><\/div><\/div> Dinner’s On Us \u2013 Cash Flow Forecast January 1, 2013 to June 30, 2013<\/p> \t\t\t(All values in US$)<\/p><\/th><\/tr><\/thead> Item<\/p><\/td> Jan<\/p><\/td> Feb<\/p><\/td> Mar<\/p><\/td> Apr<\/p><\/td> May<\/p><\/td> Jun<\/p><\/td><\/tr> <\/p><\/td> <\/p><\/td> <\/p><\/td> <\/p><\/td> <\/p><\/td> <\/p><\/td> <\/p><\/td><\/tr><\/tbody><\/table><\/div><\/figure>\n\n Next, set up the row titles.<\/p> You will need to organize rows into two main sections:<\/p> Then insert subheadings to show inflows and outflows from the following:<\/p> <\/p><\/div><\/div> Dinner’s On Us \u2013 Cash Flow Forecast January 1, 2013 to June 30, 2013<\/p> \t\t\t(All values in US$)<\/p><\/th><\/tr><\/thead> Item<\/p><\/td> Jan<\/p><\/td> Feb<\/p><\/td> Mar<\/p><\/td> Apr<\/p><\/td> May<\/p><\/td> Jun<\/p><\/td><\/tr> Inflows<\/strong><\/p><\/td> <\/p><\/td> <\/p><\/td> <\/p><\/td> <\/p><\/td> <\/p><\/td> <\/p><\/td><\/tr> Operations<\/strong><\/em><\/p><\/td> <\/p><\/td> <\/p><\/td> <\/p><\/td> <\/p><\/td> <\/p><\/td> <\/p><\/td><\/tr> Financing<\/strong><\/em><\/p><\/td> <\/p><\/td> <\/p><\/td> <\/p><\/td> <\/p><\/td> <\/p><\/td> <\/p><\/td><\/tr> Investing<\/em><\/strong><\/p><\/td> <\/p><\/td> <\/p><\/td> <\/p><\/td> <\/p><\/td> <\/p><\/td> <\/p><\/td><\/tr> Outflows<\/strong><\/p><\/td> <\/p><\/td> <\/p><\/td> <\/p><\/td> <\/p><\/td> <\/p><\/td> <\/p><\/td><\/tr> Operations<\/strong><\/em><\/p><\/td> <\/p><\/td> <\/p><\/td> <\/p><\/td> <\/p><\/td> <\/p><\/td> <\/p><\/td><\/tr> Financing<\/strong><\/em><\/p><\/td> <\/p><\/td> <\/p><\/td> <\/p><\/td> <\/p><\/td> <\/p><\/td> <\/p><\/td><\/tr> Investing<\/strong><\/em><\/p><\/td> <\/p><\/td> <\/p><\/td> <\/p><\/td> <\/p><\/td> <\/p><\/td> <\/p><\/td><\/tr><\/tbody><\/table><\/div><\/figure>\n\n Now, within the sections you’ve just created, create new rows showing the sources of income and expenditure.<\/p> It’s a good idea to separate different revenue streams out in your spreadsheet. This gives you the flexibility you need to analyze each revenue stream separately, and to evaluate cash inflows and outflows accordingly. In this example, we have separated cash flows for eat-in meals from those generated by the lunch platters, but you could have any number of revenue streams as part of your business.<\/p> In our example, the details are as follows:<\/p> <\/p> <\/p> <\/p> <\/p> <\/p> <\/p> <\/p> Think how deeply you need to analyze your costs, and how it’s appropriate to group them. Do you need to include separate lines in your spreadsheet for costs due to different suppliers (for example, different suppliers of ingredients) or can they be grouped together under one heading?<\/p> It’s often worth breaking them down if they are likely to vary considerably, as you may want to use your spreadsheet to see the impact of these varying costs.<\/p><\/div><\/div>\n\n Now you’ll add rows that will calculate and show the totals for your inflows, outflows, monthly totals, and running totals.<\/p> First, insert rows at the end of the inflow and outflow sections, labeling the rows “Total inflows” and “Total outflows” respectively. You can insert a SUM formula to calculate the total of the relevant cells.<\/p> Then, create a row showing monthly totals. This will represent the total of the inflow rows minus the total of the outflow rows. This shows your cash profit or loss for the month.<\/p> Underneath this, put in a running total (net cash) row. In this row, add your profit or loss for the period to the previous running total. This shows your financial position at the end of the period.<\/p> You can see this in the table below:<\/p> <\/p><\/div><\/div>Setting Up a Cash Flow Forecast<\/h2>\n\n
1. Set Up Column Headings<\/h3>\n\n
2. Set Up Row Titles<\/h3>\n\n
3. Insert Sources of Income and Expenditure<\/h3>\n\n
Tip:<\/h4>\n\n
4. Insert Totals Rows<\/h3>\n\n