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?

In May 2022, the annual inflation rate rose to 5.1%1, with economists forecasting further rises to come. In response, the Reserve Bank of Australia lifted the cash rate to 0.35%. CommBank’s research team forecasts a 3.3% inflation rate in FY2023, with another five interest rate rises to 1.6% by February 20232.

While no-one can be certain how costs and interest rates will change, it’s a good idea to be prepared. So, calculate how they would affect your expenses and factor them into your cash-flow forecast to make sure you’re ready.

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.

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Things you should know

1 CommBank Economics Update, 27 April 2022.
2 CommBank Economics Monthly Insights, 10 May 2022.

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. As this information has been prepared without considering your objectives, financial situation or needs. You should, before acting on this, consider the appropriateness to your circumstances.