Follow these seven steps to complete your cash flow forecast

43984, 19 Nov. 2014

Tags: companies act, cash flow forecast, cash flow, financial budgets

The Companies Act of 2008 governs how you conduct your company’s affairs.
When it comes to entering into transactions, the Act requires you to perform a liquidity test before you do anything.
This test helps assess whether your company is able to pay off its short-term debts obligations.
If you don’t perform the test, you could get a fine of up to R1 million.
So where do you even start with a liquidity test?
You start with a cash flow forecast, of course…
Here’s how to conduct one…
Complete your cash flow forecast by following these seven steps
The best way to perform a liquidity test is to prepare a cash flow forecast. It will tell you if your company has enough cash to pay its day-to-day expenses after entering into transactions.
Step 1: Predict how much money you’ll get each month
Here, you must bear in mind that sales don’t necessarily mean you have money.
For example, if you give credit terms to your customers, you have sales and probably profits, but not necessarily cash.
Also bear in mind that borrowing money increases available cash while repaying loans depletes it.
To determine what money will flow into your company each month and what will flow out, produce a cash flow forecast and take all relevant factors into account.
Step 2: Predict how much money you’ll pay out each month
In the same way you calculate money coming into your business from sales, calculate money leaving your business (your expenses).
Don’t forget that you’ll pay some expenses during these timeframes:
  • In advance, e.g. rent;
  • In the month these are incurred, e.g. salaries and wages; and
  • Later, e.g. your suppliers or your phone account.
To get the timing right, look at your chart of accounts and identify when exactly you pay expenses.
Step 3: Record any other cash amounts you expect to come into your business
You must record any other cash you expect to come into your business. This includes:
  • Interest receivable;
  • Loans you expect to raise;
  • Proceeds from the sale of assets, etc.
Step 4: Record any other cash outflows
For each month, list the cash outflows that aren’t part of your normal operations and that you don’t often include in your budget. These include any loan repayments, any asset purchases and provisional and expected assessed tax payments.
Step 5: Ensure you know your cash balance at the beginning of the first month of your forecast
Establish your cash balances at the beginning of the first month of your forecast. The opening cash balance in your cash flow forecast will be from your cash book.
In the following months, carry that month’s closing cash balance over as the opening cash balance of the next month.
Step 6: Put your cash flow forecast together
  • Take your cash inflow from trading (Step #1) and deduct your cash outflows (Step #2). This will give you the cash your business generated.
  • Add in any other cash inflows and deduct other cash outflows (Steps #3 and #4).
Lastly, include your opening cash balance and calculate the cash balance at the end of the month, which becomes the opening bank balance the next month.
Step 7: Keep updating your cash flow forecast
Remember, no-one can get a plan totally accurate so make corrections as things change. If you don’t, the gap between your cash flow forecast and reality will grow wider each month.
So, update your cash flow forecast monthly, the same way as you do for your budget.
Compare the actual income you receive and the expenses paid with your forecast.
In addition, make adjustments for unexpected amounts and amend your future forecast months as necessary.
Following these seven steps will help you complete your cash flow forecast and comply with the Companies Act.

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