Cashflow forecast report

[dalacor]

@marekkowalczyk

To avoid serious confusion, we need to make a few distinctions here:

1. Cashflow FORECASTING is looking ahead into actual recorded Payables and Receivables, invoice by invoice, and calculating their difference by, say, week.
2. Cashflow BUDGETING (1) is recording your ideas about future Payables and Receivables, by broad categories, grouped by, say, week. This is the traditional budgeting approach.
3. Cashflow BUDGETING (2) is taking the stock of your actual cash ON HAND AS OF TODAY and allocating it to rather broad Payables categories by, say, week. This is the YNAB/PACE approach.

Of them, number 3 is essential, number 1 is useful and number 2 is useless as it encourages pie-in-the-sky thinking.

When we talk about cashflow forecasting here, what do we mean?

Not sure if its worth reviving a two year old post, but this particular point is worth understanding better.

The way I see this issue is the question that should be asked is not whether 1,2 or 3 or YNAR or PACE is better, but more what businesses are trying to achieve.

As I understand it, there are presumably three main points businesses want to accomplish.

1. Project how much income and expenditure will occur over the next 12 months (whether you do that weekly, monthly or quarterly). Mainly to see what you are spending your money on in order to reduce your expenses and to evaluate where you are making money in order to improve your income.

2. Determine Net Profit as well as final Bank Balance at end of year

3. Determine Cash flow over the months to ensure that you have sufficient funds at all times?

I have found using the profit and loss in previous years and the budgeting tool that I have has enabled me to reduce my expenditure, identify areas where I am not making money and making changes to address that. In addition, it has enabled me to project my income and expenditure with reasonable accuracy and allows me to budget for expenditure like advertising etc.

However, I have find that while I can determine net profit, this approach does not help with determining what will be in my bank account at the end of the year as well as my cash flow requirements. In addition, it does not help with fixed asset purchases which are on the balance sheet not on the profit and loss sheet.

I would recommend that a budgeting tool which is essentially a future projection of your profit and loss would be a good start to add to the accounting program as I have found it to be a great help. However it is admittedly limited in that it does not cover cash flow, final bank balance as well as balance sheet transaction such as fixed asset expenditure which will naturally hit your bank balance even if it theoretically does not affect profits on paper.