Question

How do you forecast a company's future free cash flow?

Answer 1

Cash flow forecast is the most important business tool for every business.

The forecasting will tell if business will bhave enough cash to run the business or pay to expand it. It will also show when more cash is going out of business.

The easiest way to prepare cash flow forecast is to break the task into several steps.Then bring all the information together at the end.There are 5 major steps to preparing cash flow forecast are:

-Prepare the income or sales for the business- for existing business need to check the sales figures of last 5 years, then we can take decision what adjustment to be needed based on past trendsi.e. either sales increasing or decreasing or staying the same.

If we are in a new business we need to prepare cash flow forecast,start by estimating all the cash outflow. If we will get the idea how much cash needed for covering the cash going out and therefore what sales we will need to make the cover this.

Prepare details on any other estimated cash inflows-: Sources of cash( cash inflows) vary from business to business. Examples are:

I) GST rebates and tax refunds

Il)Owners invest more money ( add extra equity) in the business

lll) Government or other grants

lv)Loans are paid back to you or you sell any asset.

v)Other sources such as royalties, franchisee fees or license fees.

Prepare details on all estimated cash outflows and expenses- When we calculate our cash outflows, need to work out what it costs to make goods available. By doing this, if you need any adjustment, your sales number will be later( eg: in one month, I sold 10 units instead of 5), it will be easier to adjust actual cost of goods sold.

Expenses can be money spent on administration or operation. Again, expenses depend on the type of business you are starting or already run.

Other cash outflows-: Besides it's normal expenses cash outflows is required in other ways like;

- buying new asset in a year.

- 'one off' bank fees such as loan establishment fees

- Loan repayments

- Payments to the owner(s)

-Investing surplus funds

Prepare your cash flow forecast by putting all the gathered detail together.

Atvthe beginning you will have decided the period the forecast should cover. Since cash flows are all about timing and the flows of cash. You wiy need to have an opening bank balance (i.e. actual cash in hand) then add all cash inflows and deduct the cash outflow for each period usually by month. The number at the end of each month is referred to as the closing cash balance and this number becomes the opening cash balance for the next month.

Review your estimated cash flows to actual-: This is the most important step in all.Once we are done with cash flow, we need to go back and check whether any difference between estimated cash flow and actual bcash flow. This cross checking will bhelp to analysing why our cash flow did not meet the expectations.

Always remember that, cash flow is alk about timing and flow of cash, so when we are preparing cash flow forecast, just assure we are accurate as possible on the timing of cash flow.