What is a Cash Flow Forecast?
Knowing how your business is doing at the moment is one thing, and understanding how it may perform over the course of the upcoming year is another matter entirely. However, it isn’t a case of guessing what will happen in the next few months, as a cash flow forecast uses existing data and valuable insight to estimate the amount of money that will move in and out of your business over a defined period.
How does a cash flow forecast work?
Cash flow forecasts typically cover the next twelve months, although sometimes business owners use them for shorter periods of time, such as a quarter or even just a month. In order to create a reliable cash flow forecast, three key areas of financial information must be included, which we’ve listed below.
We understand that you can’t know exactly how much your business will make in sales next week, never mind in almost a year’s time, but it’s amazing how much can be achieved by estimating. The key here is to decide on your likely sales, as being too ambitious could result in your cash flow forecast being rendered useless.
The easiest and most effective way to do this is to consult your sales history from the last few years. Pay attention to seasonal trends, such as busy and quiet periods that occur in your industry, any special promotions you’ve run in the past, and anything else that may have resulted in a particularly defined peak or dip in sales.
Whilst putting together your sales projection, also factor in recent circumstances and estimate whether they will still apply over the coming months. The COVID-19 pandemic, Brexit and supply chain delays are prime examples, as these have had an impact on businesses in 2021 but may not apply to the same extent or even at all in 2022 and beyond.
Projected payment timings
Now that you’ve worked out roughly how much income your business will receive, it’s crucial that you include when the payments are likely to take place. For instance, some of your clients may not pay as quickly as others, plus certain organisations require a three-month payment window whereas others only need one month.
Whilst you won’t be able to predict when every single payment will go into your account, having a projected timeline will help you to manage your cash flow more smoothly.
Outgoings and payments
A cash flow forecast focuses on your liabilities as much as it does your income. Absolutely everything needs to be considered, which includes all of the tiny outgoings that may seem insignificant but actually make a difference when combined.
Common examples of outgoings are commercial rent, employee wages, business insurance, services and subscriptions, marketing and advertising, energy bills and tax payments, most of which will be fixed in terms of how much they are and when they’re due. Then you have the smaller and more variable costs, like stationery, staff room supplies, postage, and so on.
Once all of your predicted sales, outgoings and payment dates have been entered into your cash flow forecast, it should give a very good idea of how your business will perform over the coming months. If there’s a period that looks a little low, you can plan whatever action you believe is most appropriate in advance rather than as it happens.
The key is to update your cash flow forecast spreadsheet as often as required, such as amending sales, wages, bills, tax and other core data as soon as you have concrete figures.
Why make a cash flow forecast?
Your cash flow forecast will help you to make key business decisions with greater confidence. For example:
Anticipate your income and manage your budget more effectively.
Ensure employees and suppliers are paid on time.
Prepare for slow periods or cash dips in advance.
Plan for growth with greater clarity, such as when taking on new staff and investing in additional equipment.
Always know whether or not your business is achieving its financial objectives and fine-tune your budget and promotional activity accordingly.
A cash flow forecast is also useful when applying for a business loan or taking on a new business partner.
Cash flow management for SMEs
If you like the idea of having greater control over your cash flow and budgeting, we’re here to help you create an in-depth cash flow forecast. To get started, call our Yorkshire office on 01482 235575, our London office on 0207 885 0605, or fill in the contact form below.
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