Five things to remember when cash flow forecasting for your business

It's vitally important to have a good grasp of what cash is coming in and going out of your business. Here, Emily Coltman gives some top tips on managing your forecasts.

One of the main reasons small businesses have to stop trading is because they run out of money to spend on their costs. So no matter how small your business is, it’s important to draw up forecasts and keep them updated, so you always know when you expect cash to come in and go out, what sales you expect to make and whether you’re likely to make a profit.

Forecasting also gives you the opportunity to plan ‘what if’ scenarios for your business. So, for example, if you wanted to know what would happen if you started offering a new service, or if you took on a new member of staff or rented a new office, you could adapt your forecast to show you if you can afford to do this and what your would finances look like if you did.

NB It’s good practice to draw up three forecasts for your business; a sales forecast, a profit and loss forecast, and a cash flow forecast, which all feed into and from each other.

1) Forecast sales based on earning date

When you’re working out how much you expect your sales to be each month, for your sales forecast, remember to add these up on the basis of the work you do and how much you expect to earn each month, not how much you expect to be paid by your customers each month. The payments by customers will come later, when you draw up your cash flow forecast.

2) Include as many costs as you can remember

A cash flow forecast isn’t expected to be accurate to the penny. You’re not trying to predict the future; you’re trying to give your business the best possible chance of survival, and to see when you might be able to make changes.

However, it’s easy to leave day-to-day running costs out of your profit and loss forecast, particularly small costs such as monthly software subscriptions, or delivery costs, and that may have a negative impact in the long run. Include as many costs in your profit and loss forecast as you can remember and don’t miss any out just because they’re small; it’s surprising how fast all those small costs mount up!

Don’t miss out costs for which no cash physically leaves your business’s bank account either, such as depreciation, business use of home, or mileage travelled on business in your own car.

3) Should your figures be inclusive or exclusive of VAT?

If your business is registered for VAT, you need to make sure that your sales forecast and profit and loss forecast are drawn up with the figures excluding any VAT that you’re going to charge to your customers and reclaim on your costs.

That also means that if you can’t reclaim VAT on a particular cost such as business entertaining, or if you’re on the VAT flat rate scheme, you should include that VAT as part of your day-to-day running costs in your profit and loss forecast.

But when you come to draw up your cash flow forecast, you need to put your receipts and payments in there inclusive of VAT, because those are the amounts you’re actually going to take into, and pay out of, your bank account. The VAT you pay to HMRC will be one of the types of payment in your cash flow forecast.

4) Dates may be different in your cash flow forecast

In your sales and profit and loss forecasts, you include sales when you earn them and costs when you incur them.

However, the cash flow forecast is different, because then you need to include transactions based on when money changes hands; ie when you receive money from your customers, and make payments for costs.

Allow for your customers taking time to pay you, both in accordance with your payment terms and those who go beyond your terms. Allow also for any extra time your suppliers give you to pay.

5) Your cash flow forecast will include other money in and out

Your sales and profit and loss forecasts won’t include all the cash that moves in and out of your business bank account – but your cash flow forecast has to.

That means it will include money that’s coming into your business from sources other than your customers, such as money you borrow from the bank or from family members.

It will also include money leaving your business bank account for costs other than day-to-day running costs, such as taxes, or money you spend on new equipment for your business.

It’s worth taking the time to draw up your forecasts and also to adapt them regularly; for example if you start paying a new cost such as the rent of an office, or if you lose a big customer. By updating your forecasts, you’ll be able to see when your business might need some spare cash and make arrangements to source it before you’re desperate for it, and ensure your business survives in the long run.

Case study: Bradley McKenny, operations director of digital marketing agency Distract, discusses how he keeps it simple when approaching cash forecasting.

Peter and Bradley of of digital marketing agency Distract

Founded in 2015, we’ve built a business that employs 13 staff and works with companies across the UK. We started the business after my co-founder Peter Watson and I realised that new digital marketing techniques and platforms were being under-utilised by companies across the UK. We founded ‘Chatty Imp’, a precursor to Distract while we were still studying for our degrees at the University of Lincoln.

The business grew quickly and we soon acquired two smaller agencies specialising in search advertising and web development. Last year Distract was born, quickly becoming one of the East Midlands’ fastest-growing agencies.

Other than GCSE Maths, my background is not at all conducive to managing accounts. My degree is in advertising and marketing, and I work in a very creative industry. However, the nature of our work – managing advertising budgets on behalf of clients, requires a good grasp of stats and figures.

When we started the company, Peter and I knew that we had to get it right as running a business badly sets it up for failure. We enlisted the help of an accountant straight away, and use Xero for cloud accounting and invoicing, combined with a simple spreadsheet to keep track of incomes and outgoings. We review it at least once a week to try and plan ahead with regards to hiring and other investments.

Don’t ignore cash forecasting. Yes, it can seen daunting, but it’s not as hard as it seems if you stay on top of it. You really don’t have to be a numbers whizz. Also, speak to other business owners; they’ll give you advice on where to start.

Keep it simple: a Google Sheet or Excel spreadsheet with a clear layout will help you stay on keep track. And don’t be afraid to only plan three months ahead. Long-term cash flow forecasts are great but when you’re just starting out, looking too far ahead could either put you off big investments or lull you into a false sense of security. You need to plan ahead, but at the start don’t get lost in the numbers – bad or good!

Further reading on cash forecasting

Emily Coltman

Emily Coltman

Emily is Chief Accountant at FreeAgent Central Ltd and a graduate of of the University of Cambridge.

Related Topics

Cash Flow

Leave a comment