Cash Flow Planning

FDC specialist financial planners generate fully integrated profit & loss accounts with cashflow statements and balance sheets for up to five years ahead and our Cashflow Plans include a specialist cashflow planner covering 12 months ahead, with weekly projections for the initial three months.

Using a Computer to Forecast Cashflow
With the aid of a computer and suitable software, a mathematical model can be used to prepare cash flow projections and project short-term banking requirements for a business. The use of a computer-based model reduces the tedium of carrying out numerous repetitive calculations and simplifies the alteration of assumptions and the presentation of results. A computer-based model can be constructed using a spreadsheet or acquired as a stand-alone package. If constructing a spreadsheet model, be aware that it is not as easy as it might seem to build a friendly, robust and error-free planner.

A cash flow model can be used to compile forecasts, assess possible funding requirements and explore the likely financial consequences of alternative strategies. Used effectively, a model can help prevent major planning errors, anticipate problems, identify opportunities to improve cash flow or provide a basis for negotiating short-term funding from a bank.

Generally, when seeking external funding, the time horizon covered by a set of projections should be equal to or greater than the period for which the funding is needed. The greater the amount of funding required and the longer the period of exposure for the provider of these funds, the more comprehensive must be the supporting projections and plan. Typically, a computer model for short-term bank planning uses assumptions on sales, costs, credit, funding etc. to produce monthly cash flow projections for up to a year ahead. The initial assumptions can be readily altered to evaluate alternative scenarios. For example, a model could be used to explore the extent to which future sales could be increased whilst holding bank borrowings within predetermined limits; to assess the effects on cash flow of varying sales, costs or credit terms; or to determine the likely short-term funding requirements for a business.

Once assumptions on sales, expense payments etc. have been established, a model can be used to produce the cash flow projections which, in turn, indicate the likely future cash balances or banking requirements.

However, the quality of these projections will be completely determined by the standard and reliability of the underlying assumptions. For example, if forecasts for sales, working capital or costs are unrealistic or inadequately researched, then the value of the model's output is greatly diminished. An impressive set of projections is of little benefit if it is unsupported by experience or research or based on mere speculation. In fact, they could be very damaging, or even destroy the business.

Before using a model for short-term cash flow forecasting, a manager or entrepreneur should:

  • Decide the central purpose of the exercise (internal planning and control, negotiate a loan etc.).
  • Identify the target audience (directors, bank manager etc.)
  • Set the time intervals and horizon (e.g. monthly for twelve months).
  • Sort out the level of detail required.
  • Check that all the necessary key assumptions and data are to hand and have been adequately researched.
  • Compile opening balances for all items which will involve cash flows within the forecasting period.
  • Think through the likely impact of the critical assumptions on the cash flow projections. If necessary, prepare preliminary forecasts manually to confirm their overall direction and consider the underlying strategic issues relating to sales, funding, costs, stocks etc. As a guide, sales forecasts and debtor & creditor terms are likely to have the most profound impacts on short-term cash flows.

When preparing cash flow projections, be aware of the dangers of:

  • Overstating sales forecasts.
  • Underestimating costs and delays likely to be encountered.
  • Ignoring historic trends or performances by debtors etc.
  • Making unduly-optimistic assumptions about the availability of bank loans, credit, grants, equity etc.
  • Seeking spurious accuracy whilst failing to recognize matters of strategic importance.

These problems can arise as the result of a lack of foresight or knowledge, or because of excessive optimism. They can lead to under-estimation of the cash and other resources required to sustain or develop a business with potentially disastrous consequences.

When forecasting bank requirements and preparing cash flow projections, realistic views should always be taken about future prospects. There is often merit in compiling "worst" case projections to complement "most likely" or "best" forecasts and to accept that the "worst" case might occur and to plan accordingly.