You will find a working capital forecast tailored to your project in our list of 200+ financial plans
All our financial plans do include a working capital forecast.
How can you easily forecast your working capital without getting overwhelmed?
In this article, we provide a free tool to do so. If you're looking for something more tailored to your specific project, feel free to browse our list of financial plans, customized for over 200 different project types here.
We'll also address the following questions:
How can a small business determine the optimal amount of working capital?
What software tools can help forecast working capital without excessive complexity?
How can sales forecasts be integrated into the calculation of working capital?
What is the ideal liquidity ratio for a startup?
How do customer payment terms affect working capital?
What percentage of sales should be kept in cash to ensure good working capital management?
How do inventory levels influence the calculation of working capital?
The document available for download is a sample financial forecast. Inside, you'll find the calculations, formulas, and data needed to get a working capital forecast as well as a full financial analysis.
This document, offered free of charge, is tailored specifically to the realities of running a restaurant. If you need a tool for your own project, feel free to browse through our list of financial forecasts.
If you have any questions, don't hesitate to contact us.
Here Are the Steps to Easily Forecast Your Working Capital
To skip all these steps, you can simply download a financial forecast tailored to your industry.
- 1. Estimate Initial Inventory Cost:
Calculate the cost of raw materials and production for your initial inventory. Determine how many units you plan to produce initially and multiply this by the cost per unit to get your total initial inventory cost.
- 2. Forecast Accounts Receivable:
Estimate your sales volume and payment terms. Calculate the expected revenue from sales and determine how much of this revenue will be received immediately versus within a specified period (e.g., 30 days).
- 3. Consider Accounts Payable:
Review the payment terms you have negotiated with your suppliers. Determine when you will need to pay for your raw materials and other initial costs, and factor this into your working capital forecast.
- 4. Estimate Operating Expenses:
Identify your monthly operating expenses, such as rent, salaries, and marketing costs. Sum these expenses to understand your total monthly outflow.
- 5. Calculate Initial Working Capital Requirement:
Add your initial inventory cost and operating expenses, then subtract the immediate cash inflow from sales. This will give you your net working capital requirement.
- 6. Review and Adjust:
Regularly review your working capital forecast and adjust as necessary based on actual sales, expenses, and any changes in payment terms with customers or suppliers.
An Illustrated Example You Can Adapt
This example is simplified. For a more accurate estimate without manual calculations, use one of our financial forecasts tailored to 200 business projects.
To help you better understand, let's use a made-up example of a startup planning to launch a new line of eco-friendly water bottles.
First, estimate the initial inventory cost by calculating the cost of raw materials and production. Suppose each bottle costs $2 to produce, and you plan to produce 10,000 units initially, resulting in an initial inventory cost of $20,000.
Next, forecast your accounts receivable by estimating the sales volume and payment terms. If you expect to sell 8,000 bottles in the first month at $10 each, with 30% of customers paying upfront and the rest within 30 days, your immediate cash inflow would be $24,000 (30% of $80,000).
For accounts payable, consider the payment terms with your suppliers. If you have negotiated 60-day payment terms for your raw materials, you won't need to pay the $20,000 immediately.
Additionally, estimate your operating expenses, such as rent, salaries, and marketing, which might total $15,000 for the first month.
Summarizing these figures, your initial working capital requirement would be the sum of your inventory cost ($20,000) and operating expenses ($15,000), minus the immediate cash inflow from sales ($24,000), resulting in a net working capital requirement of $11,000.
By breaking down the components and using straightforward calculations, you can easily forecast your working capital needs without feeling overwhelmed.
What Should Be Included in a Working Capital Forecast?
Here are the key elements that should be included, all of which you will find in our financial forecasts tailored to 200+ different business projects.
| Element | Description | Importance | Frequency |
|---|---|---|---|
| Cash Inflows | All expected cash receipts, including sales revenue, loans, and other income. | Critical for understanding available funds. | Monthly |
| Cash Outflows | All expected cash payments, including operating expenses, loan repayments, and other expenditures. | Essential for managing liquidity. | Monthly |
| Accounts Receivable | Expected collections from customers who have purchased on credit. | Helps in predicting cash inflows. | Monthly |
| Accounts Payable | Expected payments to suppliers and creditors. | Helps in predicting cash outflows. | Monthly |
| Inventory Levels | Expected inventory purchases and stock levels. | Affects cash outflows and working capital needs. | Monthly |
| Short-term Loans | Expected borrowings and repayments of short-term loans. | Impacts cash flow and liquidity. | Monthly |
| Other Current Assets | Other assets expected to be converted to cash within a year. | Provides a complete picture of available resources. | Monthly |
| Other Current Liabilities | Other liabilities expected to be settled within a year. | Provides a complete picture of obligations. | Monthly |
| Net Working Capital | Difference between current assets and current liabilities. | Key indicator of financial health and liquidity. | Monthly |
Our financial forecasts are comprehensive and will help you secure financing from the bank or investors.
Common Questions You May Have
Reading these articles might also interest you:
- How to evaluate how much fundraising I need?
- A free example of a financing plan
- How to set up a financial plan for a small business?
What are the key components to consider when forecasting working capital?
The key components to consider include accounts receivable, accounts payable, and inventory levels.
Each of these elements directly impacts your cash flow and liquidity.
Accurate forecasting requires understanding the timing and amounts associated with each component.
How can I estimate the average collection period for my accounts receivable?
To estimate the average collection period, divide your accounts receivable by your total credit sales and multiply by 365 days.
For example, if your accounts receivable is $50,000 and your annual credit sales are $600,000, the average collection period is approximately 30.4 days.
This metric helps you understand how quickly you are converting sales into cash.
What is a good benchmark for inventory turnover ratio?
A good benchmark for inventory turnover ratio varies by industry, but a general rule of thumb is 5 to 10 times per year.
This means you are selling and replacing your inventory every 1 to 2.5 months.
Higher turnover rates indicate efficient inventory management, while lower rates may suggest overstocking or slow-moving goods.
How do I calculate my accounts payable turnover ratio?
To calculate the accounts payable turnover ratio, divide your total supplier purchases by your average accounts payable.
For instance, if your total supplier purchases are $300,000 and your average accounts payable is $50,000, the turnover ratio is 6 times per year.
This ratio indicates how quickly you are paying off your suppliers.
What software tools can help simplify working capital forecasting?
Software tools like QuickBooks, Xero, and Microsoft Excel can help simplify working capital forecasting.
These tools offer features such as automated calculations, real-time data updates, and customizable reports.
Choosing the right tool depends on your business size, complexity, and specific needs.
How often should I update my working capital forecast?
It is recommended to update your working capital forecast on a monthly basis.
Regular updates help you stay on top of cash flow changes and make informed decisions.
In volatile or high-growth periods, you may need to update your forecast more frequently.
What is the impact of seasonal fluctuations on working capital forecasting?
Seasonal fluctuations can significantly impact your working capital needs, especially in industries with high seasonality.
During peak seasons, you may need to increase inventory and extend credit terms, affecting cash flow.
Accurate forecasting should account for these variations to ensure sufficient liquidity throughout the year.