TT06 Cash flow forecasting

Guide to Financial Management

Top Tips 6

Cashflow Forecasting

Managers use a ‘cashflow forecast’ (or cash budget) to monitor how much cash they have in the coming months.

Whereas the other budgets show whether the organisation can cover its costs over the whole year, the cashflow forecast shows whether it has enough cash in the bank to meet all of its payments as they arise every week or month.

The cashflow forecast predicts the flow of cash coming in and going out of the organisation by breaking the annual budget down into smaller time periods, usually months. This helps to identify if there is ever a time when cash might run short. It allows managers to take action, such as:

  • requesting donor grants early;
  • delaying payment of certain invoices;
  • delaying some activities; or
  • negotiating a temporary overdraft from their bank.

The cashflow forecast is also useful where the organisation maintains substantial cash reserves that need to be invested to maximise investment income.

 


Seven top tips when preparing a cashflow forecast:

1. Know the timing of your activities

Cashflow forecasts are not simply the budget broken down into 12 equal instalments - you need to know when specific activities will take place. E.g. for a training project, when will the courses take place, when will costs have to be paid and will the course fees be paid in advance?

2. Record the expected timing of your payments.

Expenses must be entered on the cashflow forecast when the cash is expected to leave the bank. So an invoice for January’s electricity will probably be received in February and paid in March.

3. Salary payments

Salaries are usually paid monthly.  But don’t forget that deductions, such as income tax, are often paid to the authorities the month after salaries are paid, or in some cases paid annually.

4. Payment terms and grant schedules

E.g. sometimes auditors require a 50% deposit of the audit fee before the audit and the rest follows after the report is filed; so although this is an annual activity the actual cash movement is affected by payment terms.  Similarly, grant schedules dictate the inflow of cash from donors.

5. Unpredictable expenses

E.g. equipment repairs – it is best to put a monthly or quarterly sum.

6. Exclude non-cash transactions

Obvious but easily forgotten! Exclude non-cash transactions from the cashflow forecast (e.g. donations in kind or depreciation). So if these are on the budget, they have to be left off the cashflow.

7. Regular updates

Update your cashflow forecast monthly, starting with the actual cash and bank balances available now, always looking say 6 months into the future.

 


Top tip for using a cashflow forecast

8. Take action now

When all the expected receipts and payments are recorded, look at the month end balance for the next 6 months – if there are any months with projected cash flow difficulties, take action now (e.g. by postponing activities, getting a loan, renegotiating remittance schedules etc) to avoid the problem.

 


Top tip for avoiding cashflow problems

9. Build reserves

For good cash and financial management, cash reserves are essential as there will always be times when grants are delayed or unexpected expenses occur.

Want to learn more?

Mango’s highly acclaimed training course Getting the basics Right covers cashflow forecasting in more depth, as well as writing budgets, keeping accounts, preparing reports and setting up controls.

See our calendar of courses around the world: www.mango.org.uk/training/opentrainingprogramme

Mango’s FREE Guide to Financial Management for NGOs includes advice and tools to download and use, including a cashflow forecast format: www.mango.org.uk/guide

Mango: All about Money and NGOs
Mango helps NGOs to make more of their money by: running practical training, supporting people in finance roles, advising NGOs and donors, and publishing free tools and guides: www.mango.org.uk