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5 Vital Components Of Any Cash Flow Forecast


We review client cash flow forecasts regularly and one of the main reasons why the budgets do not match the actuals is because they have usually missed some basic components. There is not much point doing 3 way budgets or a cash flow forecast if basic elements are left off.

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Figure 1: Spend time looking at your cash flow budget - you may have missed some things at first glance.

Here are 5 areas you should ensure you have taken into account before finalising your projections.


1. Tax payments 

It's important to allow for tax payments when formulating your projections and putting them in the correct payment periods.

Remember to incorporate:

  • GST Payments & refunds (BAS);
  • Company income tax (quarterly and actual);
  • Personal income tax paid by the business.

2. drawings or dividend payments

There is little point allowing for a positive cash flow balance projection if you are going to pull money out of the business over and above your salary. Analyse your drawings and dividends in prior years from your software system (e.g. Xero or MYOB) and then work out if you can cull this back a bit. This is a good exercise in itself. Make sure that any anticipated drawings are factored into the forecast.

business valuers

Figure 2: Failure to allow for all types of cash situations can be a sleeping giant 

3. principal loan repayments

Whilst most budgets will allow for interest payments, be sure to take principal payments into account. The profit and loss budget might look great but what if the profit is not big enough to cover the loan repayments thereby placing pressure on the business to function without the required working capital?

4. slow debtors

The number of budgets we see that assume that sales will hit the bank at the same time when the sale is made is quite common. Of course this would be ok if the business did not offer credit terms and is a cash only business.

Work out your average debtor days and be sure to adjust your budget accordingly.

cash flow forecasts sydney

Figure 3: Are you looking into the sun when preparing your business cash flow forecast?

5. timing of stock purchases

Work out how long it takes to turn your stock over. Look for variances where you need to purchase due to:

  • Bulk ordering discounts;
  • Seasonal requirements (busy times);
  • Slow moving stock.

Again this is just a matter of working out some key performance indicators which can be done when you sit down with your accountant or business advisor. These KPIs will also be relevant should you need to get a business valuation as the business valuers Sydney will analyse these. The better you can improve these, the better the cash flow which in turns gives higher business valuations.

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As they say, if you're going to do something you may as well do it properly. Are your projections realistic or are they just ticking a box for your accountants, banks or business advisors?

Remember that doing this well as part of any business planning exercise will get you to think more outside the square to fix any potential shortfalls and may even make you think of ways to generate more profit and cash.

This rarely is the case where a standard profit and loss budget is used.