Why you should have a cashflow forecast for your business

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. 

 

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. 

 

• 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 next VAT bill  

• 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 each 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 information you can create your cashflow forecast. Start with your actual bank statement balance as at today, add in the weekly receipts for week 1 and deduct the expenses you have to pay out in the same week and that gives you a positive or negative cash balance. You then replicate that each week for the whole cashflow up to and including week 13. This gives you a 13 week view of where you have cash surplus or deficits and at what point they occur in the quarter. For instance, cashflow may be ok until you have to pay the quarterly VAT bill and you can see that you'll only have £25k in the business whereas the 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, helping them get clearer over the cash they have coming in and where they might be finding cash tight in the next few months. We then help them plan a way forward, however good or bad it may seem.  

 

If cash keeps you awake at night and want to discuss getting a cashflow forecast in place, get in touch here>> contact us.