Starting a cash flow forecast

In a previous blog, we explained the WHAT and WHY of preparing a cash flow forecast. The next step is HOW to prepare a forecast.

Profit and loss account
Balance sheet
Tax stuff
Cash summary
What does your cash flow forecast show you?

Profit and loss account

The first step is to can run a Profit and Loss report in Xero on a monthly basis and get it to show comparatives for previous months. To do this, just follow these instructions, and then export the report to Excel. There – you have something in writing and a good starting point!

Next, critically review the income and expenses on a line-by-line basis and adjust each month up or down where needed. Don’t sweat the small stuff though!

  • Your income may increase or decrease during holiday periods, or with the change in seasons
  • Some expenses may fluctuate depending on the number of sales (for example, purchases and commissions)
  • Think about the timing of expenses
    • Memberships may be once a year
    • Superannuation Guarantee payments are made quarterly
    • Your power bill is likely to be higher in winter
    • Rates are paid four times a year
    • Large planned maintenance costs should be included
    • When will you sell purchased goods – the next month, the next season…?
    • Do you pay less wages during the Christmas period?
  • You may be considering extending your product range – how much additional revenue do you expect? How would your costs change?
  • Maybe you’d like an additional employee – will this employee generate more business income, or perhaps take over some of your tasks to free you up? Remember – business improvement isn’t just about making money. Having downtime to enjoy your success is just as important.

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Balance sheet

Next, we add costs from outside of the Profit and Loss Account, month by month.

  • Will you purchase assets, and when?
  • Do you plan to sell an asset?
  • Will you obtain a loan?
  • Factor in any fixed loan or finance payments
  • If you withdraw regular amounts from the business as living expense, include these as well

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Tax stuff

Want to get even more tricky?

  • Add your expected GST payments to each relevant month – include a formula which roughly calculates this from the information you’ve already entered.
  • Add your expected PAYG Instalments each quarter.

Please don’t be concerned if this is a little too technical for you. Remember – you just want to start the cash flow forecast. Tweaking it can come later.

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Cash summary

The final step is to include separate rows for:

  1. The (expected) bank balance at the beginning of the forecast period – Aug 2020 in the snip below
    • For the first month, you’ll need to type in the opening balance
    • For each of the following months, your opening balance will be the same as the closing balance from the previous month, so add a formula in your spreadsheet to cover that
      Note how the opening balance for Sep 2020 is the same as the closing balance of Aug 2020 ($1,248.57)
  2. The net cash movement for the month – this will be your income plus any money received from loans or sale of assets, minus expenses, minus payments for assets, taxes and loans
    • $1,403.75
  3. The next row should have a formula, adding 1 and 2 together – this gives you your closing bank balance at the end of the month
    • ($1,248.57)

Your cash flow forecast should look something like this:

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What does your closing cash balance show you?

Now – if your formulas are working correctly, any change to any figures in any month will flow through to your forecasted closing cash balance.

  • The monthly closing cash balances may indicate you need additional money- will you go into overdraft (with high interest rates) or find another funding source?
  • Is there a build up of cash? What could you do with it – upgrade assets, wage increases, pay off debt, put aside for tax or savings?
  • What would happen if you brought forward, or pushed back, the date you purchase an asset?

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