How to forecast unpredictable cash flow

Creating a cash flow forecast is common practice for most SMEs and it's a great way to budget for the financial year. However, developing a forecast is more complicated than simply stating the expected outflows and inflows that will occur each month.

There are many variables, both internal and external, that can contribute to the growth or decline of your business operation. Catering for these variables in your forecast can be difficult so we've sourced three tips, as suggested by Heather Smith on Flying Solo, to help confirm the accuracy of your next forecast.

Build a template

Developing a template to include your cash flow information is the first step to budgeting and managing anything unpredictable that could impact your final forecast. By separating your income and payments into each month you can then review those elements that are consistent in your statement, such as filing fees, bank charges and other fixed costs.

This can be done in excel, but there are more sophisticated software options that can better prepare your forecasting document such as Calxa and Quickbooks.

Consider trends and causes

Try and identify common trends or causes that could potentially impact your forecast. A good place to start is by reviewing your previous forecasts and the past trends that were significant from previous years. For example, sales may be seasonal based on the product you are selling, or you may find that a particular announcement from the Reserve Bank can impact your business every year.

The best thing is to identify variables in your cash flow forecast that can be affected because of trends and then label them based on how they will be positive or negatively impacted.

If you want more information on different market insights and planning, Dun and Bradstreet can help.

Plan for the best, most likely and worst cases

After you label the trends that are likely to cause change to the variables in your forecast it's important to determine how unpredictable each trend is and how significant the impact will be on the particular variable.

In order to confirm the accuracy of your forecast ensure you prepare for the best, most likely and worst case scenarios that the unpredictable circumstances could have on your final forecast. Effectively you will have two or three final cash flow statements to work with that will prepare you for all circumstances.

Ineffective cash flow circulation can be a common assessment of business failure. Although your cash flow forecast will never guarantee complete accuracy, it will give you an effective indication of where money is coming from.Preparing for the unpredictable elements that can impact your forecast will make that indication even stronger.

Interested in a recent report? Dun and Bradstreet - Cash flow slows in 2013

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