Cashflow forecasts
Posted on 7th April 2024 at 11:02
If you run a business you'll have heard cashflow forecasts talked about before but what are they, how do you create one and why would you need one?
When you set up your business you probably created a business plan showing what profits you'd make in year 1, 2 and 3 etc but did you prepare a cashflow forecast? Often business owners work on generating sales and profits and think everything is ok because they have some cash in the bank etc.
A cashflow forecast is usually something they haven't got in place, and if they did have one it never gets updated and monitored regularly.
Do any of these situations describe you:
your cash flow is tight and you are struggling to put aside money to pay your bills on time
you are ok for cash at the moment but are losing sleep because you know you don't have enough to cover the VAT bill due next month
you feel comfortable in terms of cash but don't want to take a lot out of the business in case you leave it short
you have to periodically put your own wages on hold to meet other obligations in the business
If any of these sound familiar, then it’s time to take action.
Preparing a cashflow forecast sounds like a big job but it can be as straight forward as you want to it to be. Simply put, you need to list all the money coming into the business week by week for the next 13 weeks. That's income from sales, commissions, money you are putting in yourself etc. Remember though, that this is cash inflows, so you only record the cash you expect to receive. If you raise sales invoices and customers pay in 30 days you need to look back to the invoices you raised 30 days ago to see what's likely to come in this week.
Then you need to list out all your cash expenditure in the week that it is due for payment. So that will include:
wages and PAYE payments to HMRC
payments to suppliers (put them in the week they are due, not when you normally pay them)
loan repayments
the quarterly VAT bill to HMRC
rent and rates
utilities
dividend payments
HP payments for assets you have on finance
Now you have all that infromation you can create your cashflow forecast. Start with your actual bank statement balance as at today, add in the weekly receipts for week 1, less the cash you have to pay in week 1 and that gives you a positive or negative cash balance. You then replicate that week on week for the whole cashflow which gives you a 13 week view of where you have cash surplus or deficits and at what point in the quarter. For instance, cashflow may be ok until you have to pay the quarterly VAT bill when suddenly you can see that you'll only have £25k in the business but your VAT bill is £40k.
Having that advance view of cash can't suddenly solve any shortages you find but it can give you ample time to make some changes in order to try resolve a problem.
We prepare cashflow forecasts for our clients on a regular basis, either in simple Excel format so they can update it themselves each month, or more formally for a 12-24 month picture that they can use to obtain funding from lenders.
Whichever you need we can help you with, so get in touch if you want to discuss how we can do this for you - contact us.
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