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Cash Flow Forecast and Analysis

Simple Alliance, Kenya Limited


Cash Flow Problems

Without an exact cash flow projection, your business is likely to be hit by unexpected cash flow crunches.

Cash Flow Projection

Your cash flow forecast details the monies your business expects to receive and disburse every month. This projection may extend to a continuous half- or one-year period. The projection provides for certain expected lag times, for instance between:

  • Incurring some expenditure and disbursing monies to cover them
  • Billing your clients and receiving the cash
  • Recording due government taxes and remitting the money

Uses of the Cash Flow Forecast

If you properly prepare your cash flow projection, the document will assist you execute important business tasks, such as:

  • Charting expected cash flow situations over time
  • Identifying sales developments
  • Foreseeing cash flow deficits and tacking them in time
  • Determining whether your credit customers are settling debts slowly
  • Assisting in your planning for key asset acquisitions
  • Informing would-be creditors of your financial status

Preparation Process

To prepare your cash flow projection, follow a none-step process which involves determining cash flow items such as:   

  • Cash on hand
  • Cash receipts
  • Accounts receivable
  • Miscellaneous cash
  • Total cash available
  • Cash paid out
  • Other costs
  • Total cash paid out
  • your monthly cash flow

Defining Cash on Hand

Your cash on hand is the money available at the start of your cash flow forecast.  The cash on hand for every subsequent trading period is the closing cash balance for the previous trading period.

Determining Cash Receipts

For accurate cash receipts figures, record receipts within the accounting period you expect them. Cash receipt items include:

  • Cash sales
  • Collections from debtors
  • Interest revenues

Calculating Accounts Receivable

For accuracy, record expected cash receipts in the trading period you anticipate them. Here, you need to compute three figures, namely:

  • Average collection period
  • Average daily sales volume
Average Daily Sales Volume

You arrive at your Average Daily Sales Volume by dividing your previous accounting period’s total sales by 365.

Average Daily Sales Volume = Previous Trading Period’s Total Sales/ 365

Average Collection Period

To get the Average Collection Period figure, divide the value of your present accounts receivable by your Average Daily Sales Volume figure.

Average Collection Period = Accounts Receivable/ Average Daily Sales Volume

Use the Average Collection Period figure to record anticipated payments over the upcoming financial period. 

Computing Miscellaneous Cash

Record expected assorted cash receipts. Major items include:

  • Stock offerings
  • New bank loans
  • New borrowings from your family

Determining Total Cash Available

You get your total cash available by adding 4 items namely:

  • Accounts receivable
  • Cash on hand
  • Cash receipts
  • Miscellaneous cash

Computing Cash Paid Out

In this step, you compute your projected cash expenditures for the entire accounting period. Record operating expense items in the period you expect to pay for them. Add them up. Major accounts include:

  • Gross wages
  • Payroll benefits and taxes
  • Your monthly stipend
  • External and subcontracting services
  • Cost of materials
  • Maintenance and repair costs   
  • Packaging, transport and delivery expenses
  • Travel costs
  • Promotion and advertising expenses
  • Professional services costs
  • Taxes
  • Rent
  • Utilities costs
  • Communication expenses
  • Insurance costs
  • Loan interest payable
  • Other relevant costs
  • Miscellaneous expenses 

Computing Other Expenses

Compute other constant expenses you expect to incur. Major items include:  

  • Loan repayment
  • Start-up expenses
  • Capital expenditure
  • Reserve cash for purchasing big assets or for settling annual expenses
  • Your withdrawal for paying income tax, life, or health insurance

Calculating Total Cash Paid Out

You arrive at your total cash paid out figure by adding your total operating expenses to your total ‘other expenses’.

Total Cash Paid Out = total Operating Expenses + Total ‘Other Expenses’

Computing Your Cash Flow
You determine your cash flow status by deducting your Total Cash Paid Out from your Total Cash Available figure.

Cash Flow Status = Total Cash Available - Total Cash Paid Out

Ideally, your cash flow status needs to be positive at the end of every accounting period.  If it is not, institute measures to bridge the cash deficit.

Monthly Cash Flow Projection Updates

You need to record any unexpected expense or income by updating your cash flow projection every month.  

Actual versus Projected Estimates Comparison

Each time you receive or pay out monies, record these transactions against the projected estimates on your cash flow projection chart.  Assess your cash flow forecast for accuracy. Make any needed changes.       

As a small business person, you need to possess up-to-date cash flow forecast techniques. Possession of such skills could prevent you from facing sudden cash flow crises. The cash flow projection expertise enables you to accurately figure out future cash flow situations for your business. You are thus in a position to make out future cash flow emergencies and to set out appropriate strategies for managing the cash flow crunches. Consistent cash flow monitoring would also enable you to identify and manage sales bottlenecks. While planning asset acquisitions, cash flow forecasts could enable you to plan accordingly. Moreover, should you seek the assistance of financial partners, cash flow predictions could help in making accurate evaluations of your business. The steps to developing cash flow forecast are quite simple. After computing the total projected cash outflows and inflows for your business, you derive the monthly cash flow figure. You arrive at the cash flow status by subtracting total cash outflow from the sum cash inflow.

Copyright (C) 2016, Simple Alliance Kenya Limited

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