Why you need a cash flow forecast and how to produce one

One of the most useful bits of advice that established entrepreneurs give to people starting their own business is this: ‘cash is king’.

It doesn’t matter what business you’re in and how profitable it is, if you run out of cash, your business will struggle to continue. If you can’t pay suppliers you’ll have nothing to sell, and it’s a quick, vicious circle from there to insolvency.

A good business needs a positive cash flow, where the amount of money coming into the bank account each month at least matches the amount of money going out.

This is something that needs to be monitored at every stage of business growth. Obviously, if your business is going through a rough patch, you need to keep a very close eye on your finances.

Overtrading can mean cash flow problems for thriving, profitable businesses

Bizarrely, if your business is doing very well, there is an even greater danger it could run out of cash. It’s a phenomenon called overtrading.

Let’s say you accept a new £10,000 order, which requires you to pay out £8,000 for materials and wages. The chances are that you’ll have to pay that £8,000 at least a month before your client pays the £10,000.

If your business doesn’t have that cash spare, it will run out of money and throw a very large spanner in the works.

This is where a cash flow forecast is essential. It’s a simple tool that will allow you to spot an obvious gap in your finances before it happens, allowing you to take steps to minimise the effects.

Knowing that you are likely to hit a cash flow problem in the future gives you time to explore your options and to put a solution in place. This could be taking out a short-term loan or requesting an overdraft from your bank.

You will be in a much stronger position to negotiate terms, and more likely to secure the cash you need, if you do this well in advance of the anticipated shortfall.

Preparing a simple cash flow forecast

A simple cash flow forecast will take an hour or two to set up initially, and then a few minutes each week to update the figures.

It’s important to understand that the power of the tool lies in its forecasting abilities – not as a historical record. Leave it to your profit & loss figures to examine past performance.

If you have purchased business planning software there may well be a cash flow forecasting tool included in the package. Or there are specific cashflow templates you can buy online.

Alternatively, you can easily produce a simple cash flow forecast for your business on a spreadsheet program such as Excel. If you don’t have that you can get OpenOffice free here.

Download our simple cash flow planning spreadsheet

Yo save you time setting up a spreadsheet yourself, you can download our free ByteStart cash flow planner which allows you to easily forecast your cash flow for 12 months.

You’ll see there are two columns for each month. This lets you make a forecast and then enter real figures as they come in. Over time this will help you make your forecasts as accurate as possible.

To get set up, you need basic information about the money coming in and out of your business. Dig out the paperwork on regular expenses that go out every month, such as premises, wages, phone bills, etc. You need to find every penny you spend, so check bills off against a recent bank statement.

Group costs and revenues to keep your cash flow forecast simple

Group these bills; for example put desk phones, mobiles & broadband together as “phones”. Then enter them into the expenditure part of the spreadsheet. Copy these figures across for the other 11 months if you think the costs will remain at the same level. If you think any costs will change, simply enter what you estimate the costs will be.

Next, you need to estimate revenue for each month. Again, it may be beneficial to group types of revenue together as it helps to keep your cash flow planner simple. Remember this tool looks at money in and out of a bank account, so work you do today may not turn into cash for 30 to 60 days.

Finally, get the opening bank balance for this month. You’ll be able to get this off your most recent statement or from your online banking.

Enter this figure in the yellow box at the bottom. Each month you should ensure your bank statement and the planner match (a planner like this is a great way to spot any mistakes made on your account).

The spreadsheet reveals your projected cash position every month

And that’s it. The spreadsheet will work out for you whether you have a negative or positive cash flow each month, and how that will affect your bank account.

On a weekly or monthly basis, all you need to do is remember to enter every single expense and piece of income. Update your planner at the same time each week, and it will soon become a good habit. The information you will get from your planner will be invaluable as you run your business.

If your cash flow forecast shows that you may go overdrawn in 6 months’ time, then at least you have plenty of time to find ways to overcome the looming cashflow problem.

Use your forecast to test the effects of different business scenarios

It’s also a good idea to use your forecast to try out different scenarios, so you can see the effect these would have on your cash position.

For example, what would happen to your cash flow if your main customer hit problems and didn’t pay you for 2 months? Or what if your key supplier demanded to be paid in advance?

Should every business have a cashflow forecast?

Not all businesses need to make forecasts – you may be a consultant, for example, with very few monthly transactions, so this tool is unlikely to add any value to your business.

However, many small companies deal with high levels of transactions – both incoming and outgoing. A cashflow forecast is an important method of ensuring that your bank account has enough cash to cover all eventualities – or to identify if you need to secure short-term sources of finance.

You will be able to avert a potential crisis. If stock is damaged, for example, you will need to make sure you have enough funds to continue trading until your insurers pay out for the damaged stock.

It will also help you avoid the problem of ‘overtrading’, which can force an otherwise successful businesses into financial trouble. For example, if you accept a £5,000 order, but you need to spend £3,000 on parts / costs in order to fulfil the order, you need to be sure you have enough cash in reserve, as you may not receive the customer’s payment before the agreed delivery date.

Useful Resources / Downloadable Templates

Last updated: 23rd April, 2021

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