Cash Flow Forecasting

Many business owners panic a little when they think about cash flow forecasting, as they don’t really know where to start. They would prefer to leave it to an expert, such as their accountant. In fact, many businesses will not have a cash flow forecast and will only think about one if they need to—for example, when raising finance. If they create one themselves, however, they will understand their figures better and be much more informed about choices in their business.

What can a cash flow forecast tell you?

If you know how much cash you have available you can better plan for expansion within your business, particularly if you need investment. You may just want to be sure that your business will survive another challenging year. By taking a few steps now, you could be in a much stronger position and feel confident that you’re on track and also recognise when it’s time to take alternative action.

A cash flow forecast need not be a daunting or impossible task. There are many templates out there that you can use; you can even start with a blank document and write the following categories on it:

• Opening balance

• Income in

• Expenses out

• Cash balance

• Profit

Try to do this on a monthly basis. Enter the total that you can reasonably expect in terms of sales (this is where many businesses come unstuck). If it helps, break this figure down further: how many of x product at x amount would you reasonably expect to sell? This is a great starting point and if you’re already trading, you will find this much easier to do, as you’ll already have a good idea of the numbers. Cash may not come in straightaway, however, and you will need to factor this in too.

Plenty of businesses fail simply because they run out of cash.

How much does it cost to produce your item(s)? When growth reaches a certain point, you may need to employ more staff or acquire bigger premises. This could have a knock-on effect, in that you may need more equipment or machinery. If you’ve planned for this scenario, you’ll know if you can afford to buy the equipment outright, or whether you’ll be looking at renting it or borrowing the money to buy it.

When you approach a lender for financial help, if you have a cash flow forecast prepared, you will be in a much stronger position. Factor in financing costs, too, so they can clearly see if you can afford to borrow the amount you’re asking for. This will give them peace of mind.

It’s important to back your information up with assumptions, which we touched on earlier. For example, is it reasonable to expect that you can double your turnover in one year, if your business trades for fewer hours? Always have facts behind the figures and make sure that, if you need to explain anything to a third party, that you understand it yourself!

We only have to look at all the failures on Dragons’ Den—those with great ideas, but who hadn’t prepared their figures correctly, and who couldn’t subsequently explain how their business would prove a success.

You should hopefully now understand the concept of a cash flow forecast and why they’re so important. Use one as a working document to continually monitor your business’s performance.