beginners guide to the cash flow forecast report

A Beginner’s Guide to the Cash Flow Forecast Report

Cash flow forecasting is an important part of business modelling. Its aim is to foresee shortfalls of cash and potential areas of danger to the business, while also estimating the surplus cash the business will have available to expand and carry out new projects.

The most complete way of presenting a cash flow forecast is (arguably!) in a cash flow report. This is a sheet showing rows and totals for all the cash that flows through the business. In Brixx, these rows drill down into the structure of the plan.

What makes up a cash flow forecast report?

A cash flow forecast is a report showing when cash is predicted to flow into and out of the business. It is divided into 4 sets of cash flows, each of which are related to different types of business activity:

  1. Operating activities
  2. Investing activities
  3. Financing activities
  4. Taxation

 

Why is the cash flow split out into these different types of activity? It seems superfluous at first – surely cash inflow and outflow is enough? Well, for a simple cash flow – yes – but there’s a lot of extra information that can be gained from splitting your cash flow out like this. The most immediate gain is clarity – structuring your number to make them easier to understand. But there are more benefits…

Splitting out operating, investing, financing and tax cash flows provide a wealth (aha…) of information about the business. Each of these different types of activities has a different impact on the business, and provide different indications of how financially secure it is and where potential difficulties might arise from in the future.

 


 

1. Operating Activities

This is the cash that the business generates during its normal operations. It’s sales, the cost of those sales in materials or delivery, and paying other necessary costs – bills, salaries and interest payments on loans.

Cash Received

Incoming cash
The amount of cash the business collects from customers. Note that VAT is not included in Cash Received – this is because the cash collected from VAT does not belong to the business and is split out into a separate cash flow (Taxation) below.

Cash Paid to Suppliers

Outgoing cash
Cash paid on operating costs and all costs directly related to selling products and services (other than staff costs).

Employee Costs Paid

Outgoing cash
The amount that paid to employees, and other employee-related costs such as pension contributions and NI.

Interest Paid

Outgoing cash
The interest or fees charged for any loans that the business has. This may seem more at home in ‘Financing Activities’ below – but paying interest on borrowing is a necessary part of running the business once it takes on debt.

TOTAL Operating Activities

Incoming and outgoing cash
The total of cash income, less all costs relating to suppliers, employees and interest.

What makes Operating Activities important?

The businesses’ operating activities are the basis of all financial activity in the business. Selling, and paying the costs necessary to keep the business running are the core activities of almost every business.

Looking at the operating activities line, we can see where the business is likely to run low on cash and when it will have a surplus of cash from operating activities. As these are activities that are essential to running the business and sellings its products or services, the Operating Activities line provides a good indication of the health of the business.

Breaking down each of the lines above helps us to understand where the biggest costs to the business are and how often, or how infrequently they need to be paid. It can also help to plot seasonal trends in incoming cash against outgoing cash.

 


 

2. Investing Activities

The amount spent on or received from assets, credit agreements or other investments.

investing activities cash flow in brixx

Assets

Incoming and outgoing cash
This is the amount spent on resources such as fixtures and fittings, land and buildings, plant and equipment, etc. Cash gained from selling assets also goes to this line. What counts as an asset? Find out in our guide to Assets here.

Investments

Incoming and outgoing cash
The amount spent on or received from investments.

Interest Received

Incoming cash
The amount received as interest from the cash the business has in savings accounts or other interest bearing accounts.

TOTAL Investing Activities

Incoming and outgoing cash
This is the total from the assets, investments and interest received.

What makes Investing Activities important?

Cash flows from investing activities show how much the business has spent on lasting infrastructure and the ROI of investments made outside of the company itself. These activities show on the one hand how grounded the business is, how much cash has been spent on the necessary long term requirements of the business, and on the other how widespread the business’ cash inflows are.

Secondary sources of income for the business, whether the selling of old assets, or income received from investing activities, can be incredibly useful to the business in hard times, or for seasonal businesses whose net cash from operating activities varies seasonally.

 


 

3. Financing Activities

The amount of cash generated or spent by external activities such as taking out a loan, or getting investment from outside the business (by selling shares for example).

financing activities cash flow in brixx

Debt Drawdown

Incoming cash
Cash from borrowing, such as a loan. This line shows the initial inflow of cash when a loan is taken out.

Capital Repayment

Outgoing cash
Cash used to repay loans/borrowing each month. This just looks at the repayment of cash, not the interest paid on this cash, which is part of Operating Activities.

Equity Released

Incoming cash
Cash that has been injected into the business by shareholders, including the owner.

Dividend Payments

Outgoing cash
Payments from the business to the shareholders.

TOTAL Financing Activities

Incoming and outgoing cash
The total cash flow from debt drawdown, capital repayment, equity and dividend payments.

What makes Financing Activities important?

The Financing Activities section answers a key question – in cash terms, how is the business funded? When are these payments made, when does the business have a need for cash and how is that need to be fulfilled?

The burden of debt can be crippling for businesses that rely on borrowing, either to fund their startup period or to bridge gaps in their cash flow. Financing activities play a dual role of zooming in on the incoming cash and outgoing capital repayments the business makes as part of its borrowing agreement, and the cash generated by and paid out to inventors in the business.

Ready to start planning your cash flow the easy way?

Cash flow for startups
Bike shop cash flow forecast chart dashboard

4. Taxation

This is a summary of the amounts the business will need to pay in tax.

Corporation Tax

Outgoing cash
Tax paid on the profits that the business generates. To find out more about Profit, and

VAT

Incoming and outgoing cash
This line shows both VAT paid on goods and services and VAT received from selling products and services. VAT will accumulate and then any VAT owed will be paid off. VAT payments are usually quarterly but this can vary depending on the size of the business.

TOTAL Taxation

Incoming and outgoing cash
The total of all tax that the organisation will pay.

What makes Taxation important?

Do I need to answer this? Oh, ok then 🙂 Taxation is terrifically important for all businesses. It tends to be a ‘forgotten cost’ that comes as a surprise to business owners – often a very big surprise. Taxes are generally paid monthly, quarterly or annually, and ensuring that the business will have sufficient cash to pay them 1, 6 or 12 month’s time is key to cash flow forecasting.

VAT and Sales Tax are interesting in particular. If you sell something taxable you are effectively acting as a tax collector for the government. The tax money that the business receives as part of the sale never belongs to the business – it belongs to whoever the business is collecting the tax for – in most cases the government. This is why taxes like VAT and Sales Tax are split out into a different part of the Cash Flow to Income – because while they are cash the business has gained in the course of trading, they should not be treated as the business’ income.

The golden rule where tax is concerned is to always, always ensure that you do not reach into the pot of tax cash the business has collected. Doing so places the business in a precarious position when it comes to being able to pay that tax in the future. It is best to set this money aside from the businesses’ operating cash flows, as the Cash Flow forecast does, and ensure this cash is used exclusively to pay tax.

 


 

The Bottom Line… s

closing bank position brixx cash flow

Balance Brought Forward

Cash at start of month
The bank balance that the business had at the end of the last month. This includes all cash that the business has in its bank accounts.

Income Less Payments

Incoming and outgoing cash
The total of cash received or paid from all sources this month. Income Less Payments is one of the most important lines in the Cash Flow Forecast. It’s a net summation of every cash flow that happened this month, and shows how this particularly month performed.

Closing Bank Position

Cash at start of monthIncoming and outgoing cash
The total from adding income less payments to the Balance Brought Forward.

The is the fabled ‘Bottom Line’ – the end result of the Cash Flow Forecast. It shows the cash the business has in the bank at the end of the current month, including cash the business at the start of this month, plus (or minus…) the amount of the cash the business gained (or lost…) this month.

Closing Bank Position is also the figure that will be used as the Balance Brought Forward in the following month.

So, that’s how the Cash Flow Forecast works. You don’t need to build one though – we’ve done that for you.

 

Try Brixx for free to see this forecast in action for your business.

Robin Booth 18th June 2018 By
 

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