Knowing how to write a cashflow forecast is an important part of running any business. Whether you are a start-up, or a sole trader, a good cash flow forecast can help you plan for the year ahead and make good business decisions along the way. The knowledge for how to write a cashflow forecast may not be something you have had an opportunity to learn, especially if you are an entrepreneur, or just starting out as a freelancer. Fortunately Prestige Business Management can help. Here we look at how to write a basic cash flow forecast. Remember we are always available to help you answer any of your business cash flow questions.
Why do you need a Cash Flow Forecast?
Cash flow is the amount of money that goes in and out of your business. Cash flowing in is usually the money you get from sales. But it could also be money from debt repayments, selling unnecessary assets, rebates and grants. A basic cash flow forecast is a great point to start when planning your business activity. Once you know how, it will become one of the most important insights into the success of your business and how to strategise your next steps. Cash flow planning is essential. Firstly you need to know that you have enough cash in the bank to pay your bills. Staying on top of your cash flow with a cash flow forecast will show if you’re going to run out of money and whenabouts that are likely to occur. A cash flow forecast allows you to plan ahead and avoid any shortfalls. For example, you know when certain payouts will occur, like paying your tax bill, so you can use a cash flow forecast to predict how much you will need in reserve to pay your tax bill, as well as all your other regular running costs. If your cash flow forecast reveals a shortfall, you have the opportunity to make changes to your cash flow to cover this. You could choose to spread other larger costs out over the year. Or perhaps it will show that you need to reduce your overheads, find new investment, or spend time generating sales. On the other hand, your cash flow forecast might show that your businesses profits are doing well and you might want to consider how to use this to grow your business. This could be by expanding into new markets, investing in new products, taking on bigger premises, or recruiting new staff. Having an effective cash flow forecast can help you decide what will work best for your business. Prestige Business Management can offer advice in all areas of logistical planning and business growth.
How to Start a Cash Flow Forecast
Your cash flow forecast can cover any length of time from a few weeks to many months. A good start is to plan as far ahead as you can accurately predict. If your business is well-established, you might have predictable sales patterns and data from previous years that you can use. To forecast your sales, look at last year’s figures to see if you can spot any trends, like increased trade at Christmas for example. You can make add predictions to your cash flow forecast based on whether sales increased, decreased or stayed the same. As a start up this can be more challenging, as well as taking into consideration economic fluctuations due to aberrant years such as 2020/21. However good business planning will help you make some initial predictions and test your ideas. As a new business you could start by estimating all the cash outgoings as this will give you an idea of how much money the business needs to bring in to cover your costs.
Set Achievable Targets
Most businesses are interested in growth. This may well be one of your primary reasons for writing a cash flow forecast, however there are often further steps to take and goals to achieve before focussing on expanding your business. Set yourself achievable short term targets to begin with. Don’t worry too much if you can’t plan very far ahead. Your cash flow forecast can change over time. In fact, it should. Once you have a good measure of how closely your income matches these figures month by month, you can use the results to predict more accurate estimates. Adjusting your cash flow predictions in this way gives you great insight and can inform other business decisions.
Income and Expenditure
For each week or month in your cash flow forecast, list all the types of income you expect to come in. There are cash flow software packages you can use, or a simple spreadsheet. Make one column for each week or month, and one row for each type of income.
| Income | Week 1 | Week 2 | Week 3 |
| Sales | |||
| Tax refunds | |||
| Grants | |||
| Investment from shareholders | |||
| Licence fees |
Cash flow is all about timing, so when you write your cash flow forecast, try to be as accurate as possible on the timing of your inflow and outflow estimates. Remember to enter the cash value in the week or month that it is actually in your bank account. In other words put the figures in for when you know clients will pay your invoices, or when bank payments will clear.
Enter all forms of income, including any non-sales income such as grants or investments. Add up the total for each column to get your net income. If your business offers a range of products or services you will want to break those down in more detail.
As well as your income you need to include a complete picture of your expenditure, also known as your outgoings. For each week or month, make a list of all the money you’ll be spending. Once you’ve listed everything you expect to spend in each week or month, add up the total for each column to get your net outgoings.
| Expenditure | Week 1 | Week 2 | Week 3 |
| Rent | |||
| Salaries | |||
| Materials | |||
| Marketing | |||
| Tax bills |
Work out your Running Cash Flow
For each week or month column, take away your net outgoings from your net income. That will give you either a positive cash flow figure (if you have more cash coming in than you are spending) or a negative cash flow figure (if you are spending more cash than you have coming in). You can then keep a running total, from week to week, or month to month, to get a picture of your cash flow forecast over time. Too many negative weeks may indicate a need for change. Equally a few positive months might signal that you’ve got enough money coming in to expand or invest. A running cashflow will help give you an insight to what are natural fluctuations and what are signals for change.
Remember to start your calculations with an opening bank balance – this is your actual cash on hand. The number at the end of each period is referred to as the closing cash balance. This will be the opening cash balance for the next period.
How to Improve Cash Flow
Once you’ve made your cash flow forecast, make sure you go back and check what you estimated against the actual figures for the period. This is the most important step. Doing this will highlight any differences between estimated and actual so you can see why your cash flow didn’t meet your expectations. If you’re not going to be bringing in enough income to sustain your business, you can then take steps to improve your cash flow. This could be reducing costs by making changes to your supply chain or your services or seeking ways to increase sales. Other ways could be to streamline or outsource your administrative operations. Another option could be managing your working capital – managing stock and payments to suppliers, or recovering outstanding debts.
At Prestige Business Management we can help your Business
At Prestige Business Management we can help you understand and manage your cash flow effectively for the success and future of your business. Find out what we can do for you. Call us today on 0203 773 2927.
