Cash flow forecasting

A cash flow forecast is in essence a cashbook that projects you or your business’s income and outgoings for any given period in the future, eg week, month, quarter or financial year.

For each period, it lists:

• your projected starting account balance
• your predicted income
• your estimating outgoings, eg bills, salaries, raw materials
• your projected ending account balance
• any money left over.

It’s typically presented as a spreadsheet, but many contractors, sole traders and small businesses use accounting software and work with their accountants or bookkeepers to ensure greater accuracy. 

A cash flow forecast is only as valuable as the information and detail put into it.

This needs careful thought. You’ll have to make an informed judgement call on how much income you think you’ll generate.

Include three variations of your predicted income:

• A pessimistic estimate.
• A realistic, or most likely, estimate.
• An optimistic estimate.

You’ll be better prepared for different scenarios — and if you’re seeking capital, you can show investors and bank managers you’re not just planning for the best-case scenario.

Predicting income for established businesses

Use your past financial data to help predict your future income.

Include any expected bumps or hits to your income, eg periods of growth and investment, marketing drives, or holiday periods.

Predicting income for new businesses

Those new to business won’t have long-term existing sales data to go on — but you can still make informed predictions using benchmarking data and expert advice.

• Speak to an accountant with experience in your industry.
• Use Stats New Zealand’s Annual enterprise survey to get an idea of your potential sales.
• Use Inland Revenue’s industry benchmark figures.
• Use the Employee Cost Calculator.
• Consider paying for expert assessments of the economic performance of your industry.
• Get a mentor — or a director, if you have a board — with start-up experience to guide your predictions.

Annual enterprise survey(external link) — Stats NZ

Industry benchmark figures(external link) — Inland Revenue

Employee Cost Calculator(external link)

The more detail, the better.

Drill into as many bills and expenses as possible, including everything from petty cash to winter heating bills.

If you’ve been in business for some time, look back over your past outgoings.

If you’re new to business or working as a sole trader or contractor, add up all the potentials costs of getting started and your ongoing costs.

Speak to your accountant to make sure your list of outgoings is as definitive as possible.

• Not doing it — cash flow forecasting is an effective tool to prevent financial trouble.
• Being overly optimistic when you’re predicting future income — to have any real merit, your predictions need to be honest and backed up by data.
• Not documenting your current financial activities — your past income and expenditures will help you accurately predict your future cash flow.