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A Five-Stage Checklist for Preparing Cashflow Forecasts

September 12, 2017

Understanding cash flow is one of the key steps to running a successful business. Good cash flow management will help ensure your business runs smoothly and it gives you the insight to keep on top of your business' financial health.

The fundamental step in preparing a cashflow forecast is having a profit & loss forecast as your basis for calculating and understanding the cash implications for your business.

The following points are some thought starters for preparing cashflow forecasts:

1. What are the origins of the cashflow forecast?

Questions to consider:

Who are you preparing the cash flow for? Yourself or your bank?
Will it be used to assist with the running of your business and assist your decision making?
What are the relative inputs of you or your internal finance team or your external accountant in generating the cash flow?

2. The starting point of the cashflow forecast

What is the opening bank balance? It can be the subject of error/manipulation but can easily be confirmed by reference to account balance information and should be reconciled to your balance sheet.

3. Internal numerical consistency

Mistakes with spreadsheet formulas can easily be made, so it is essential to always check numerical consistency. A cross-check of totals is a good overall guide to numerical consistency.

4. Validity of the underlying assumptions

A cashflow forecast is almost meaningless without knowledge of the assumptions on which it is based.

Have you written down the key assumptions that have been made?
How does you feel about the underlying cash flow? Is it seen as optimistic, pessimistic or realistic?
Have past financials been used as a basis for generating the cash flow?
In particular, how do sales figures relate to past years?

Apply selected ratios (for example, gross margin and net margin) to the cash flow figures and compare with previous years’ ratios as reasonableness checks. Determine whether any extraordinary items have been left out. Ensure that any scheduled debt repayments and/or dividends are included in the forecast.

5. Critical consideration of sensitivity analysis

Questions to consider:

Have you undertaken any sensitivity analysis?
Has this sensitivity analysis been thorough enough to identify the critical assumptions of the cashflow?
What other sensitivity analysis should be undertaken? E.g. increased costs, the winning of new contracts, etc.