What's a cashflow forecast?

A cash flow forecast is an estimate of the amount of money you expect to make and spend over the next 12 months. It can be a vital planning tool for your business and help you:

  • Make informed decisions about where to invest your resources
  • Balance short-term needs with your long-term goals
  • Plan for forecast costs, including pricing and interest rate increases
  • Make sure you have funds set aside for unexpected expenses.

Here are some questions to consider when you’re preparing a cash flow forecast for your business.

What are your fixed and variable costs?

Most businesses have both fixed costs and variable costs. Fixed costs are expenses that don’t change over the short term (e.g. a retailer pays the same amount of rent whether they’re having a busy or slow day). Examples of fixed costs include:

  • Payroll costs for permanent employees
  • Rent
  • Insurance
  • Repayments on term loans

Variable costs typically change as your sales rise and fall (e.g. a retailer pays more for stock when sales rise). Examples of variable costs include:

  • Raw materials
  • Shipping costs
  • Stock
  • Short-term labour costs (for example, seasonal employees to meet increased demand)
  • Repayments on flexible finance facilities, such as overdrafts
  • Sorting out your fixed and variable costs helps you understand how your expenses could change in line with your sales, and how much revenue you need to earn to cover the unavoidable costs of doing business.

How are your costs likely to change?

The Reserve Bank Board, on the first Tuesday of each month, will revise and decide on the cash rate in order to control the supply of money and how Australia will achieve economic growth. To determine the cash rate, the Reserve Bank will look to keep the increase of the cost of general consumer goods (inflation) to 2-3 per cent on average1. Keeping within this target will preserve the value of money and ensure sustainable level of economic growth.

An increase in the cash rate aims to reduce spending and reduce the supply of money in the economy, and therefore, attempts to curb inflation.

A decrease in the cash rate aims to encourage spending and increase the supply of money and the growth in the economy.

No-one can be certain how costs and interest rates will change, it’s a good idea to be prepared. You may be able to calculate how the cash rate would affect your expenses and factor them into your cash-flow forecast to make sure you’re ready.

Visit the CBA Economic Research & Insights portal which provides a comprehensive view on issues affecting Australia and key international economies, financial markets, and sustainability.

What are your margins today and how might they change?

Your profit margins are a comparison between your revenue and your costs:

  • Your gross profit margin compares your revenue with your variable costs.          
  • Your net profit margin compares your revenue with all your fixed and variable costs. 

Higher margins tend to mean higher profits. If your costs increase, your margins will be reduced, unless your prices also rise. That’s why it’s important to keep an eye on your margins and consider whether you should focus your spending on the highest margin goods and services for your business.

What's your adjusted cash balance after pending costs?

Your adjusted cash balance is the total amount of money your business has in the bank, allowing for any pending transactions. It will tell you if you can afford any immediate payments due or upcoming bills.

What's your current ratio?

Your current ratio is a measure of how solvent your business is. Solvency is the ability of your business to pay its debts. The higher your current ratio, the more able you are to pay your bills. Current assets include things like unpaid invoices and cash in the bank. Current liabilities include unpaid bills and customer prepayments for work not yet done.

Do you have any spare capacity?

Know when you can take on more, or when you need to work within current capacity. You can use your cash-flow forecast to work out when your busy periods may be and look to your business plan to find when you may have time for extra activities.

Contact your local Business Banking Specialist for a business financial health check. It’s quick, confidential and free.