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Understanding cash flow modelling

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What is a cash flow model?

A cash flow model is an analytical tool utilised by businesses to forecast their financial health. It encompasses a comprehensive review of a company's assets, income, expenses, debts, and investments, providing a clear picture of its potential future performance and its key objective of maintaining solvency.

This model is pivotal for strategic planning, enabling companies to prepare for future market changes and even economic downturns.

The approach to cash flow modelling varies across businesses, as there's no universal strategy that fits all. However, the creation of an effective cash flow forecast model typically involves considering three essential elements:

  • Beginning cash balance: The initial amount of cash available at the start of a period, usually a month.
  • Cash inflows: This includes all cash entering the business from its operations, investment returns, and financing activities, such as loans or equity.
  • Cash outflows: The total cash expenditures of the business, covering all operating costs like utilities, loan repayments, rent, payroll, taxes, and other necessary expenses.

Understanding these components helps in accurately predicting a company's financial trajectory. Find out more about cash outflows vs. cash inflows.

Understanding the basics of cash flow

Cash flow, the lifeline of any business, is the net amount of cash being transferred into and out of a business at any point. It's crucial for maintaining solvency and guiding strategic business decisions.

Operating cash flow

This is the cash generated from a company’s main business operations.

Find out more

Investment cash flow

This is the cash used in, or generated from, investments in assets.

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Financing cash flow

This is the cash exchanged between the company and its owners or creditors.

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Key benefits of cash flow modelling

Risk assessment

It helps identify potential cash shortfalls.

Strategic planning

It assists in long-term financial planning and investment strategies.

Performance analysis

It enables tracking the effectiveness of business strategies.

Step-by-step guide to building a cash flow model

Step 1: Data collection

Gather historical financial data, including income statements, balance sheets, and cash flow statements.

Step 2: Determine the time frame

Select a suitable time frame for the model, which typically ranges from monthly to annually.

Step 3: Forecast revenue and expenses

Predict future revenues and expenses using historical data, market analysis, and economic forecasts.

Step 4: Calculate net cash flow

Deduct projected expenses from revenues to find the net cash flow.

Step 5: Factor in investment and financing

Include projected investment activities and financing arrangements in your model.

Step 6: Analyse and interpret results

Review the cash flow projections to spot potential shortfalls or opportunities.

Best practices in cash flow modelling

Regular updates

Continuously update the model with the latest financial data.

Conservative assumptions

Employ realistic and conservative estimates to prevent over-optimism.

Stakeholder involvement:

Engage with key stakeholders for their input and to validate the model.

Have you ever thought about invoice finance to help improve your cash flow?

Invoice finance allows you to release cash quickly from your unpaid invoices.

As your lender, we can release up to 90% of your invoices within 24 hours. On payment of the invoice from your customers, we will then release the final amount minus any fees and charges. There are different types of invoice financing options available to businesses depending on the situation and the level of control they require in collecting unpaid invoices.

We are an invoice financing company who offer a solution whereby payments are collected on your behalf managed by our team of expert credit controllers so you can focus on running your business. Our confidential invoice discounting solution is offered to businesses who want to maintain their own credit control processes, therefore this remains strictly confidential so your customers are unaware of our involvement.

Get in touch

Contact our friendly UK advisors on our freephone

0808 250 0859

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The benefits of invoice finance companies such as Novuna Business cash flow

  • Boost your cash flow without having to wait up to 120 days for your customers to pay you

  • Release up to 90% of the invoice straight away, and the final 10% when the invoice is settled

  • Access funds within 24 hours from initial appointment with our revolutionary digital onboarding process

  • Benefit from our in-house credit control processes, allowing you to focus on running your business, instead of chasing clients for payment

  • Six month trial period followed by a rolling contract

Want to understand more cash flow finance terms?

Our Cash Flow Finance Resource Hub has been set up to help SME's with cash flow finance advice, tips and resources to help with their cash flow position.

We explore ways you can begin improving your cash flow situation and start getting your business on track to positive cash flow.

Quickly get the right invoice finance solution for your business, simply fill out the requirements below to get your quote:

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