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Cash Flow Forecasting is a projection of the flow of cash over a period of time, usually on a monthly basis and covers a twelve-month period. It is a summary of cash banked, payments made and the resultant effect on your bank balance.

Overdrafts and bank loans
Banks will ask businesses for their Cash Flow Forecasts to establish overdraft requirements and demonstrate debt-servicing ability. A large portion of home business owners will give this task to their accountants to do, which in fine, but it is not a difficult job and if you complete your own cash flow it can:

• save you money
• help you understand the projections and have ownership of the figures
• enable better control and management
• enable easier comparisons between actuals and projections
• allow you to identify adverse trends at an early stage, and allow for early corrective action.

Offering terms of trade
Home business owners in particular, often go out of their way to accommodate their customers, but it\'s important to know when you are putting your business at risk by doing so. Selling on terms that have not been well thought out can cripple a business, because the business has to pay its suppliers before it is paid for its sales. Even though the trading results of the business show a profit, it has not got sufficient cash on hand to pay its way (its working capital is being used to support its customers).

At an early stage of setting up your business you should decide what your credit terms will be and who will qualify. Will you provide credit to anyone who wants to purchase from you? Will you at least have an application form to find out about his or her credit history etc.? (You are, after all, lending to them and the banks certainly don\'t lend without asking a lot of questions). No business wants to write off bad debts. You might even prefer to consider providing a credit card payment option as an alternative, to avoid having to provide credit.

When would you do a Cash Flow Forecast?
You should do one annually as a matter of course and review it frequently, but other triggers would be:

• requesting borrowing or increased lending from your financier
• starting up a business
• buying a business
• experiencing major sales growth
• capital restructuring/repayment
• purchasing a major asset

How do you do one?
You will have had to complete your Profit and Loss monthly projections first as a significant portion of this information will be mapped across to the Cash Flow Forecast (CFF). You will have also had to clear the dust off your crystal ball to do the Profit and Loss and make your assumptions. (If you plan to share your Cash Flow Forecast with anyone, for example the bank, these assumptions and the rationale behind them will help provide credibility to anyone you provide your forecast to. It is thus important that you outline your assumptions and record them as an attachment to your forecast).