What cash flow forecasting means
A cash flow forecast is an estimate that shows how much money is coming in and going out in your business for any given period in the future.
For each period, it lists:
- your projected starting account balance
- your predicted income
- your estimated outgoings
- your projected ending account balance
- any money left over.
A cash flow forecast can be a spreadsheet or accounting software. You can get help from an accountant or bookkeeper to make sure you’re doing this right.
Predicting income
To predict your income, consider these three variations:
- a pessimistic estimate
- a realistic estimate
- an optimistic estimate.
It’s useful to show investors you’re prepared for different scenarios.
Predicting income for established businesses
Use your past financial data to help predict your future income.
Include any expected obstacles or benefits to your income – for example periods of growth and investment, marketing activity, or holiday periods.
Predicting income for new businesses
Even if you don’t have past financial data, 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.
- Consider paying for expert assessments of your industry’s economic performance.
- Get a mentor with start-up experience.
Common mistakes
Some common mistakes to be aware of when predicting income are:
- being too optimistic when you’re predicting future income
- not documenting your current financial activities.
Estimating outgoings
To estimate how much money is going out, look at as many bills and expenses as possible. Include any future cost changes too – for example, hiring new staff or paying off business loans.
If you’re planning on hiring new staff and aren’t sure how much this will cost, get an estimate using our Employee Cost Calculator.
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 potential costs of getting started and your ongoing costs.
Speak to your accountant to make sure your list of outgoings is as definitive as possible.
How to use your forecasts
You can use forecasts to:
- build your case for funding or investment
- avoid financial trouble
- plan for future cash shortcomings
- meet your tax obligations
- plan asset purchases
- plan for growth or expansion
- make an informed decision if you’re considering borrowing
- benchmark your performance
- test different strategic scenarios
- figure out the best time to invoice
- forecast the cost of hiring more employees.
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