Cash Flow Was Positive But Spent More Than Cash Flow Creating Cash Flow Forecasts

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Creating Cash Flow Forecasts

If you’re looking for advice on creating a cash flow forecast, here are some tips and pointers. First, you need to distinguish between what are ‘income and expenses’ and what are ‘cash inflows and cash outflows’. Let me explain this with an example:

When you issue a sales invoice to one of your customers, there are differences between how that transaction affects your profit and how the same transaction affects your bank balance and when. Let’s say you withdrew your bill on 28 November 2009 and the bill was £1,000 (excluding VAT or sales tax). For profit and loss purposes, we would include £1000 in the November profit and loss statement, which is very simple and really obvious. But when it comes to recording the ‘cash effect’ of that same transaction, you need to think a little more about how you record it.

Firstly, if you are a business that has to charge VAT or sales tax, the amount you will receive (cash inflow) will be greater than £1,000. If the rate of VAT or sales tax was 15%, the amount of ‘cash’ you will receive in your bank account will be £1,150 and not the net amount of the bill. Also, not all customers pay you right away, and in some cases, customers may take months to pay you. So let’s say that this particular customer pays you in 30 days, which would be December 26, 2009 (let’s forget 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 the time difference.

Finally, you should include the £150 as part of the “payment” in your return when you pay VAT/sales tax to your government, which may not happen until February 2010. There are other complications that can arise play with your profit and loss vs. with cash flows and you will have similar complications related to business expenses and their interaction with ‘cash outflows’. The best way to prepare a cash flow forecast is to spend some time planning it and reviewing what is actually happening in your business. You’ll also need to consider any capital expenditures you may be planning and how that affects your cash flow, as well as how the depreciation of those assets affects your income statement.

For easy to use cash flow forecasting software.

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