Creating a cash flow forecast for your small business

A good cash flow forecast is a valuable tool. But how do you plan ahead if you’re just starting out? And how do you create a cash flow forecast that’s useful? Here, we’ll explain how to create a cash flow forecast that can help take the pressure off your small business in the short term, and make it easier to grow in the long term.

Why do you need to create a cash flow forecast?

Understanding your future cash position helps you to make better decisions about funding and how to grow your business, responsibly. It’s essential information if you’re hoping to expand your business, buy more stock, or take on extra staff.

A good cash flow forecast helps you to understand if you’ve got enough money coming in to cover all of your overheads, and to pay those staff and suppliers. If you don’t have enough cash coming in, then you can’t pay your bills on time. This affects your credit ratings and, ultimately, could lead to the end of your business.

What makes a cash flow forecast so important?

Everyone’s in a different situation – that’s the beauty of being unaverage. You may be starting out as a sole-trader, or you may have been running a small business for some time. However, every business is dependent on the activity of its creditors and debtors, and it is important to maintain a healthy balance between the two.

If you get paid late by a customer, or if you have to settle an invoice earlier than you expected, or the business owner does not plan properly and takes too much money out of the business, then your business may become financially vulnerable. Low cash levels means extra pressure for you to deal with. It takes away some of your freedom to make choices about how the business grows or runs, day to day.

The answer to this problem is to project your cash flow, and try to predict any action that’s needed to prevent that from happening. This is called cash flow forecasting, and this is the simplest way to set-up a 13-week cash flow forecast:

How to set up the simplest cash flow forecast

You’ll need to reconcile what’s coming in and going out regularly. Generally, if you are seeking funding, cash flow forecasts are produced over 12 months. However, many small businesses find it’s beneficial to update their cash flow on a weekly basis over a 13 week period. 13 weeks is just over a quarter or a season in calendar terms. It’s also the usual length of time used by accountants, investors and lenders to assess if a small business has a positive outlook for its cash flow.

On a spreadsheet, add these titles to four rows: Opening balance, Outgoings, Income, Closing balance. Then, at the top of the spreadsheet, each of the next 13 weeks needs a separate column. Try to use a date that’s consistent (in other words, don’t worry about allowing for Bank Holidays).

Start each weekly column with the opening balance you have at the bank. The figure you record is the actual balance – hard cash – that’s showing in your business bank account on the Monday morning.

Outgoings covers everything you expect to pay out in the week. One subtotal figure is what you need, but breaking this into overheads and costs can help you to see where you have financial pressure points. Common categories include:

• The property costs of renting your business premises and the utilities you use
• Administration costs such as telephone, printing, stationery and post
• Software packages and subscriptions you pay regularly – monthly or annually
• Large one-off payments you can see coming up, such as new equipment
• Your employees’ wages and the National Insurance contributions you make
• Fees you pay for professional services and to subcontractors
• Any payment for finance e.g. loan repayments or asset finance repayments
• The taxes you’re expecting to pay including VAT
• What the owner wants to take out of the business e.g. as a salary or dividend

Next, make a note of the money you expect to receive during that week from sales or other sources (rents, for example). Then use the spreadsheet’s formulae to subtract the income from the outgoings.

That calculated, projected closing balance is your cash flow forecast. It’s how much you think you’ll have in your bank account if all the income comes in on time and you pay all your expenses on time. Carry that forward to the opening balance of the next week – and repeat the process.

You may be surprised by how far forward you can project your income, particularly if you’ve already started issuing invoices. But you’ll also see, very quickly, how useful a cash flow forecast is for monitoring who you’re expecting to make payments and what the impact might be if those payments are delayed.

Jargon-buster

Cash flow

A forecast of the money going in and out of your bank account.

Cash income (cash in-flow)

The money coming in from sales or other sources of income.

Cash outgoings (cash out-flow)

The money going out in overheads, costs of sales or other expenses.

Overheads

How much it costs to run your business including rent, utility costs and marketing.

Turnover

The total sales of a company.

Working capital

The money used for the day-to-day running of your business. The cash flow forecast helps the business owner to understand what level of working capital is required by the business.

Top takeaways

Disclaimer:

Please note that these guides are provided for information purposes only and not as advice or recommendations. Before deciding to undertake any course of action you may wish to seek independent professional advice.