Time
CAN be on Your Side with "Make Time for Success!" Discover
the 39 essential tools needed to map out your goals, maximize
your effectiveness, and win control of your time and your life.
Mind
Tools Career Coaches give you the focused personal help you
need to find direction, think through your goals, and make the
very most of your life and career.
Cash Flow forecasts help you to build a model of the way in which cash moves within a project or organization. They help you to predict whether the sales or income you forecast will cover the costs of operation. They also allow you to analyze whether a project will be sufficiently profitable to justify the effort put into it.
Cash flow forecasts can also be useful for analyzing your own personal finances. This is useful when you are about to make difficult financial decisions.
By carrying out a Cash Flow forecast on a spreadsheet package you can investigate the impact of changing factors within the forecast. If you have structured the spreadsheet correctly then you will be able to see, more or less instantly, the effect that changes will have.
Normally we structure Cash Flow Forecasts in a standard way. This
is explained below. Other sorts of forecasting can be carried out
with spreadsheets. A good way of structuring these is to firstly
analyze the system being forecasted with a system
diagram. This system diagram will show the relationships between
factors. You can then quantify these relationships, and build a
model based on them. The structure of the model will depend on the
system being modeled.
How to Use the Tool:
We structure the Cash Flow Forecast as a table. On the table we have columns for each period (normally a month) within the forecast. Rows show individual cash movements such as sales of a product, sales costs, and particular expenses.
We create the table for the forecast in three stages. Refer to the example in Figure 1 (below) as we run through the stages:
1. Set Up Column Headings: Decide the period of time over which you want to run your forecast,
and the length of the periods within it. Typically the forecast
will run over 1-2 years, with the periods as months.
Head up one column with the title 'Cash Movement'. Then enter the periods of the forecast as the next column headings.
This will give you column headings of, for example, Cash Movement, January, February, March, April.. etc.
2. Set Up Row Titles:
We organize rows into three main groups:
Income:
These rows show income expected during the period. Set up a
separate row for each source of income. Examples might be:
Sales of ABC product
Sales of BCD service
Investment income
Etc.
Where costs of operation are directly dependent on the amount
sold, you may decide to deduct the direct cost of the sales
made within this group of rows. Put in a subtotal at the bottom
of the group.
Outgoings:
These rows show all of your costs, itemized by the type of cost.
Examples might be:
Staff salaries
Payroll taxes
Stationery
Telephones
Etc.
Set up a subtotal at the bottom of this group.
Totals: The next row shows the total of the income rows minus the total
of the out-going rows for the month. This shows you your profit
or loss for the month.
Underneath this, put in a running total. In this row add your
profit or loss for the period to the previous running total. This
shows your financial position at the end of the period.
3. Estimate values: By now you should have a table marked out with column headings and
row titles. Now fill in the values of the cells on your table. An
easy way of doing this is to fill in the first column, and then
use the spreadsheet 'Fill… Right' function to copy values across.
Then adjust values in the other columns appropriately.
When you are entering projections for sales for a new business, bear in mind you will not sell much until your customers have seen mention of your business several times (often 6 or 7 times). Your estimates for sales will be much more reliable if you base them either on previous years' revenues, on trial marketing, or on good quality market research.
When you are entering values for costs, try, where possible, to base projections on costs from previous years. If this is not possible, base your estimates on real prices quoted. This keeps your estimates as realistic as possible.
4. Calculate! On most modern spreadsheet packages this will happen automatically,
providing you have set up totals correctly as described in section
2. As you enter and change the values of cells within the spreadsheet,
you should see that the period totals and running totals change
appropriately.
Cash Flow Forecasting is a relatively simple technique for checking
the viability of a project. Cost/Benefit
Analysis is another. These are good techniques for decisions involving
relatively small amounts of money. Where large sums are involved (for
example, in financial market transactions), project evaluation can become a complex and sophisticated art,
which uses more formal techniques. The fundamentals of this are
explained in Principles
of Corporate Finance by Richard Brealey and Stewart Myers – this is something of an authority on the subject. The book is reviewed
at the top of our right hand side bar.
Example:
A motor
home enthusiast has decided that he wants to set up a motor home hire company. He has researched the costs of set up, and estimated
the number of weeks of hire he can sell during the year.
Note that he has been quite optimistic in hoping to sell all the
weeks of holiday available during the high season of July and August.
He will charge the same price as his competitors for a holiday.
Looking at these figures, the enthusiast is very worried - although the business scheme he wants to set up will return a small profit of just under $10,000 at the end of the year, he will be nearly $18,000 in the red at the end of March. Unless he has this amount of spare cash of his own and is prepared to tie it up in the venture, or he is willing to arrange a loan or overdraft facility (which will incur further costs), his proposed business model is not viable.
He may just have saved a lot of time, money and stress by using a Cash Flow Forecast.
Key points:
Cash Flow Forecasts are important tools for investigating whether a project or business is viable. They allow you to experiment with changing factors, to see the impact that this will have. Spreadsheet packages are invaluable for cash flow forecasting.
We set up Cash Flow Forecasts in the following stages:
Setting out column headings for periods (normally months) during
the forecast.
Setting out three main groups of rows:
Income rows, with a subtotal
Expenditure rows, with a subtotal
Period total and running total rows
Entering values within cells: Ideally you should do this from
real data, or from formal market research information. If this is
not possible, then you will have to use the best estimates you can
make.
We welcome appropriate reprinting and reuse of Mind Tools material,
however, you must
get our permission first!
To do this, please visit our Permissions Center.
MindTools.com is one of the Internet's most-visited career skills resources. Click here to see analysis.
Mind Tools
Free eNewsletter
New Career Skills - twice a month PLUS Quick Guide to Problem Solving Free!
Subscribe to our free e-newsletter, and get
new skill-builder tools every two weeks. Plus get our Quick Guide to Problem Solving worth US$9.99 free when you subscribe!
"Great
newsletter. Simple and not too long. Great articles. Thank you."
Mandi J Luis, Burlington, Ontario, Canada
What People Say
About Mind Tools...
"Been meaning to pop off a note to
your Team and yourself to say how appreciative I am of your
erudite grasp of business tooling. I do, deeply appreciate your
efforts."
Dorian Glass, Rhine Road,
South Africa
"Thanks so much. I am
so happy to have access to your newsletter. Great tool!"
Fami Sharif-Pour, Woodland
Hills, USA
"I am a avid reader of
your newsletters and articles. I am from the island of Jamaica
and do find your articles quite informative, inspring, motivating,
creative and just GREAT. The style of writing is one which lures
you to read more and more and even more. I would like to be
able to write like that one day. Keep it up."
Time
Management
