Forecasting cash flows (medium-term)

Many firms have had to forecast their cash flows in order to understand their financing needs in the coming year and often to substantiate their application for CBILS loan. How can they arrive at a realistic sensible forecast in such times of uncertainty?

The short answer is that any forecast of the future will be wrong-but that we can get an idea of where we are headed. Provided we are clear about our assumptions we can track the main variables and adapt our response accordingly.

The approach we have adopted is not complex but is detailed.

Firstly, we recognise that the Covid/lockdown will affect all departments differently-so we forecast at department level then aggregate the firm.

We start with the budget income for each department for the coming year-month by month we then ask a simple question. For that department, for that month, what percentage of our budget do we expect to bill (collections come later)?

Best done to the nearest 10%. Spurious exactness is unwarranted. This can be done in a simple spreadsheet and the calculations take only a few lines but can be very powerful.

This format allows us to track the accuracy of our forecasts and update them regularly by tracking the percentage achieved each month against a predetermined standard we can assess the impact in each area and make our staffing and resourcing decisions accordingly.

Any forecast about the future is bound to be wrong-they can only be as good as our assumptions, but this approach gives a logical framework to make decisions regarding funding and people.