If you’re looking for tips on how to create a cash flow forecast, here are some tips and advice. First of all, you need to distinguish between what is ‘Revenues and expenses’ and what is ‘Cash inflows and outflows’. Let me explain this through an example:

When you issue a bill of sale to one of your customers, there are differences between how this transaction affects your profits and how the same transaction affects your bank balance and when. Let’s say you invoiced on 28th November 2009 and the invoice was for £1,000 (net of VAT or sales tax). For profit and loss purposes, you would put £1,000 in the profit and loss account for November, which is very simple and quite obvious. However, when it comes to recording the ‘cash effect’ of this same transaction, you need to think a bit more about how to record it.

Firstly, if you are a business that has to collect VAT or sales tax, the amount you will receive (the cash inflow) will be more than £1,000. If the VAT or sales tax rate was 15%, the amount of ‘Cash’ you will receive in your bank account will be £1,150 and not the net amount of the invoice. Also, not all clients pay you right away, and in some cases, it can take months for clients to pay you. So let’s say this particular customer pays you within 30 days, which would be December 26, 2009 (forgetting for a moment that this is actually Boxing Day!). Therefore, for cash flow purposes, you would include £1,150 in the December cash flow forecast, giving you a temporary difference.

Lastly, you will need to include the £150 as a ‘Cash Withdrawal’ part of your forecast when you paid VAT/sales tax to your government, which may not be until February 2010. There are other complications that could arise. Play your profit and loss against your cash flows and you will have similar complications associated with business expenses and how these interact with ‘cash outflows’. The best way to prepare a cash flow forecast is to spend a little time planning it and reviewing what’s really going on inside your business. You’ll also need to consider any capital expenditures you may be planning and how this impacts your cash flow and how depreciation on these assets impacts your profit and loss account.

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