Preparing a Short-Term Cash Flow Forecast

Home , Budget, Cash flow, Cash flow forecasting, Income statement, Profit (accounting)

Preparing a short-term What is a short-term cash How does a short-term cash flow forecast and why is it flow forecast differ from a cash flow forecast important? budget or business plan?

27 April 2020

The COVID-19 crisis has brought the importance of cash flow A short-term cash flow forecast is a forecast of the The income statement or profit and loss account forecasting and management into sharp focus for businesses. cash you have, the cash you expect to receive and in a budget or business plan includes non-cash the cash you expect to pay out of your business over accounting items such as depreciation and accruals This document explores the importance of forecasting, explains a certain period, typically 13 weeks. Fundamentally, for various expenses. The forecast cash flow how it differs from a budget or business plan and offers it’s about having good enough information to give statement contained in these plans is derived from practical tips for preparing a short-term cash flow forecast. you time and money to make the right business the forecast income statement and balance sheet decisions. on an indirect basis and shows the broad categories You can also access this information in podcast form here. of where cash is generated and where cash is spent. Forecasts are important because: They are produced on a monthly or quarterly basis.

• They provide visibility of your future cash position In contrast, a short-term cash flow forecast: and highlight if and when your cash position is going to be tight. This enables you to take action in • Looks at cash coming into and cash going out of time to get through a liquidity crunch. the bank accounts and can be directly compared to the transactions on your bank statement. • The information is often required by shareholders or banks to assess whether any requested financial • Provides a clearer picture of how much money support is sufficient or excessive (they will also you’ll have in a given week and therefore how want to see your budget or business plan for the much you can afford to pay creditors. next 12 months or more). • Helps you to determine whether you need to collect in specific debts owed by customers or Lisa Ashe delay payments for a week, for example, to be able Partner, Transaction Advisory Services to make payroll. +44 (0) 20 7951 4921 [email protected] • Gives you a much more detailed view of how much money you have and how much time you have to fix any liquidity problems that may arise.

ey.com/uk/covid How do you prepare a short-term cash flow forecast? There are five key steps:

Start with what you Include other receipts Estimate receipts and Check if you have left Sense check the know — unwind your or payments you know payments for future anything out output opening balance sheet will happen in the sales and purchases coming weeks

• Start with the cash balance These may include: • Cash receipts for future sales • Consider unusual receipts and • Does the weekly trend for the in your accounting system — obtain the best information payments to make sure that next 13 weeks make sense? and reconcile it to your bank • VAT refunds where you have you can on the sales forecast they have been included in the statements. already submitted the return and apply your standard forecast in the week that makes • Did you expect to have more payment terms to estimate sense. or less cash than the forecast • Cash from the sale of assets • Use the information you have when you will receive the cash. indicates? If so, go back and on customers that owe you • Check receipts and payments check your assumptions. • Payroll runs and PAYE/NIC If you expect that customers money (typically aged trade won’t pay on time, you may off against your bank debtors list) and estimate when • VAT payments need to defer cash receipts to statements or the cash account they will pay you. You can later weeks. If you have a few in your systems so that you estimate this based on average • Rent payments large customers that have non- don’t forget VAT refunds, payment terms, or by looking standard trade terms, it may standing orders, direct debits • Interest on loans or principal at historic trends for your be worthwhile forecasting their or other payments. repayments largest customers, or any other cash receipts individually. method that makes sense. If you think that customers will • Cash payments for future delay paying you, defer the purchases — obtain the best cash receipt to a week when information you can from they are more likely to pay. purchasing and then apply your typical payment terms to • Use your aged trade creditors determine when you will pay list and estimate when you them. Again, if you won’t pay will pay them based on normal according to terms, put the credit terms. If you don’t think payments in the weeks you are you will pay all your trade most likely to pay. creditors on normal credit terms, adjust the payments • Check that you haven’t left to the weeks when you think anything out of the forecast — you will pay them, taking into these might include proceeds account when you intend to from asset sales, VAT refunds, make payment runs (weekly, and any payments that don’t go bi-weekly or monthly). through your purchase ledger. Short-term cash flow forecasting: five top tips

Always reconcile your Check whether all Involve the business Variance analysis is Prioritise your opening cash balance the cash in the bank outside of finance key payments — don’t just to the bank statement account is accessible listen to the “squeaky wheel”

Forecasts sometimes You may have cash in the Finance teams forecasting Understanding your Liquidity is tight for many may show a misleading bank that you can’t access in isolation from operations variances and whether they companies at the moment, healthy cash position due to pay creditors, e.g., cash can often lead to flawed are permanent differences so prioritise the suppliers to an error in the opening in tills in stores, cash that assumptions that can have (like lower overtime costs that you need to pay based cash balance, that would you’ve posted as collateral serious consequences. because of lower production) on the specific needs of have been picked up if the for imports, minimum Develop an understanding or just timing differences your business. Remember reconciliation had been cash balances. It’s helpful of inflows and outflows by (you delayed paying certain to make sure to include checked. to show these kinds of having discussions outside suppliers for a week) will those that you don’t pay on balances separately and of finance, for example help you to forecast more normal terms later in your call them “trapped cash”. with the sales team who accurately. Compare your forecast. Remember, there is always have direct contact with actual cash receipts and a level of safety cash a customer whose cash payments each week to last needed to run the business: receipt is forecast, or with week’s forecast as this will check whether the weekly purchasing who will forecast help you to adjust your new balance left after deducting when goods or services will forecast for differences and “trapped cash” is sufficient be received. new information. for normal operation.

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