Business Finance Consulting

You Need a Cash Flow Forecast!

Cash is the lifeblood of any business, large or small.

When cash runs out, the business goes bust: Ansett, Babcock & Brown, Centro, HIH and OneTel are some of the famous names that went belly up. Thousands of businesses do the same every year, for the same reason.

All bankruptcies are not avoidable: Sometimes the business model is flawed, the market conditions change, or a fierce competitor comes in and ravages everything.

I recall an article in the Australian Financial Review stating that 28% of the business failures were caused by poor financial management!

Those bankruptcies could have been avoided if the business had better planned the cash movements: The periods of famine would have been foreseen and the business would have taken measures to sail through the storm.

The key to this problem is called: Cash flow forecast. Cash flow forecast is not a miracle recipe. It is a tool that all business owners should work on and work with.

Let’s take an analogy. If you had to drive from point A to point B on a road you don’t know, in an area you don’t know, with an unfamiliar vehicle: Would you just drive off and hope for the best? Or would you check the total distance, the vehicle fuel consumption and how many litres in the tank?

Well, driving a business is the same: The road is unknown and the needs in terms of fuel are also unknown. Unless… you do a cash flow forecast.

And this is the secret: A cash flow forecast will help any business to financially make it to the next point!

The way it does it is by considering the timely effect of cash: When it comes in minus when it goes out.

The easiest way to proceed is first to do a little budget of incomes and expenses.

As an example, let’s assume this first table is the budget for your business, Total year and then spread over monthly periods:

In $000 Total Month1 Month 2 Month 3 Month 4
Sales 1,260 80 90 100 110
Other Income 30 5 4 3 2
Total Income 1,290 85 94 103 112
Purchases 938 70 72 76 80
Rent 60 5 5 5 5
Wages 120 10 10 10 10
Other Expenses 144 12 12 12 12
Total Expenses 1,262 97 99 103 107
Net Profit 28 -12 -5 0 +5

In the above table, we have entered the elements as they occur, in the month in which they occur: Purchases for $70k in Month 1 and Sales for $80k also in Mopnth 1.

So you might be thinking:

– “My profit will be $28k, so everything is fine.”

– Or: “If I lose $12k in Month 1 and $5k, in Month 2, then I need $17k to finance the business, until becoming profitable.”


You forgot to consider that your supplier wants to be paid upfront, that it takes time for you to either make or receive the goods before you can sell them and finally, that the money from your sales does not reach your bank account instantaneously.

To do your cash flow forecast, you need to place the amounts in each month considering when your bank account receives money or sends out a payment. With our above example, the cash flow forecast would look like this:

In $000 Month 1 Month 2 Month 3 Month 4 Month 5
Cash from Sales 0 80 90 100 110
Other Income 5 4 3 2 2
Total Cash In 5 84 93 102 112
Purchases 70 72 76 80 80
Rent 5 5 5 5 5
Wages 10 10 10 10 10
Other Expenses 12 12 12 12 12
Total Cash Out 97 99 103 107 107
Cash at Opening 0 -27 -42 -52 -57 -52
Movement -27 -15 -10 -5 +5
Cash at Closing -27 -42 -52 -57 -52

The above table tells you that you will need to fund a total of $57k to survive the Month 4 and not $17k as the budget apparently showed! Without these funds, your business just cannot operate.

In the early stages of a business venture, business owners should do this exercise on a weekly basis. Once the business has been running for some time and the profits are healthy, the periodicity can be changed from weekly to monthly.

Even if your business has been going for some time, you need to ensure that the Cash balance remains positive at all times. If some periods show a negative figure, you need to take measures before the problem kicks in:

– Increase takings;

– Improve collection process;

– Organise more funding;

– Delay payments;

– Reduce expenses.


Good luck to you and your business venture!