Cashflow forecasts – the basics

Every business should have a cash flow forecast so that it can project the amount of money coming into the business (inflow) and the amount of money leaving the business (outflow). Your cash flow will help you to identify peaks and troughs in your finances. Used effectively it is a valuable tool for your business. A cash flow forecast usually covers a 12 month period for smaller businesses, larger businesses may need to produce one for three or even five years.

The cash flow forecast should relate to the actual money that is due to be collected in and paid out in each period, not to the month when an invoice is raised or bill received (a sales forecast will contain this information and can be used to create the cash flow forecast).

Cash flow forecasts are often produced on a month by month basis, but you may find that a shorter period is of benefit when tighter financial control is needed, in fact some businesses operate these controls on a day by day basis during difficult periods.

A projected cash flow predicts the amount of money that you have accurately estimated will come into the business each month and the amount that will be paid out each month. It is important to remember that a cash flow forecast makes up part of the overall business plan and needs to reflect the same information contained within other parts of the plan.

A cashflow example.

If you are looking to rent premises for your business and the cost of this is £300 per month then you should show this money within the cashflow forecast under the month in which it will be paid. Therefore if it is £300 per month (to be paid on a monthly basis) then the amount will appear on the cash flow forecast under expenditure each month.

However if the rent is paid quarterly in advance with payments being made in January, April, July and October, then in this scenario the cash flow would show the rent as £900 in January, April, July and October. It is important to predict as accurately as you can when producing your cash flow forecast, but some headings will prove harder than others to estimate and of course you will not get it all right.

It is crucial for all businesses to have enough cash in hand to make sure they can pay their bills on time. A cash flow forecast will help you to project your financial needs, but remember it will need to be updated with actual figures each month to get the full benefit. Cashflow forecasts can:

  • Help new businesses identify how much capital they will need to cover start up costs and cover initial trading
  • Enable identification of a potential short fall in income and allow you to take action
  • Help with identification of potential increases in costs again allowing you to take appropriate action
  • Assist you to identify cash shortages before they arise
  • Help you to stay within your financial limits
  • Give you essential financial information before you take on additional financial commitments
  • Help you to decide if you need a loan or an overdraft
  • Help you to see the period of time over which you will need to take out finance and the amount you can afford to pay back each month.

Elements of a cash flow include:

  • Opening bank balance
  • Money received (receipts)
  • Money going out (payments)
  • Difference between money received and payments made – this can be either a positive or negative figure. Negative figures are usually shown in brackets and / or in red
  • Closing bank balance

Good cash flow management is central to maintaining the financial stability of any business – even basic measures can make a huge difference your business.