As a business owner, cash flow forecasting is essential for predicting your company's financial future. This guide covers its importance, benefits, techniques, and tips for creating an accurate projection. Whether you're a new entrepreneur or an experienced professional, this tool can help your business achieve its financial goals.
A cash flow forecast reveals the ebb and flow of money in and out of your business, providing a clear picture of its financial health now and in the future. It's a dynamic tool, not a one-off exercise, that should be continually updated with actual figures to maintain an accurate view of your cash position.
Cash flow forecasting is indispensable for maintaining a healthy financial position. By anticipating future cash inflows and outflows, you gain a deeper understanding of your business's financial landscape, leading to more strategic and confident decision-making.
A cash flow forecast allows you to:
Simply put, cash flow forecasting offers numerous benefits that are vital for the success of your business. It's a proactive step towards improving your financial well-being and securing a prosperous future.
To get you started, here's a simple template you can follow:
Choose a timeframe for your forecast, typically starting with 12 months, to account for seasonal variations and annual trends.
Detail all sources of incoming cash, including sales receipts, investment interest, loan funding, etc. Use your sales forecast to estimate revenue and consider credit terms that may affect the timing of payments.
Review past bank statements to identify recurring expenses like supplier payments, wages, rent, utilities, and loan repayments. Factor in payment terms with suppliers to accurately predict outgoing cash flows.
If your business is VAT registered, incorporate VAT into your income and expense figures. Estimate VAT payments or refunds to HMRC for the relevant quarter.
Regularly adjust your forecast based on actual cash flows. This ongoing process refines your predictions and ensures accuracy over time.
A popular approach is the rolling 13-week cash flow forecast. This method offers a balance between accuracy and forward-looking visibility. Here's a simplified example:
| Period | Week 1 | Week 2 | Week 3 | Week 4 | ... | Week 13 |
| Cash Inflows: | ||||||
| Sales (Cash) | £5,000 | £8,500 | £6,200 | £7,800 | £9,000 | |
| Sales (Credit) | £12,000 | £15,000 | £10,800 | £13,200 | £14,400 | |
| Loan Drawdown | - | - | - | - | - | |
| Other Income | £500 | £300 | £450 | £250 | £600 | |
| Total Cash In | £17,500 | £23,800 | £17,450 | £21,250 | £24,000 | |
| Cash Outflows: | ||||||
| Raw Materials | £3,500 | £4,200 | £3,800 | £4,500 | £4,800 | |
| Wages | £6,000 | £6,000 | £6,000 | £6,000 | £6,000 | |
| Rent & Utilities | £1,200 | £1,200 | £1,200 | £1,200 | £1,200 | |
| Marketing | £800 | £1,000 | £900 | £850 | £950 | |
| Loan Repayment | £1,000 | £1,000 | £1,000 | £1,000 | £1,000 | |
| VAT Payment | - | - | - | £4,800 | - | |
| Total Cash Out | £12,500 | £13,400 | £12,900 | £18,350 | £13,950 | |
| Net Cash Flow | £5,000 | £10,400 | £4,550 | £2,900 | £10,050 | |
| Opening Balance | £10,000 | £15,000 | £25,400 | £29,950 | (calculated) | |
| Closing Balance | £15,000 | £25,400 | £29,950 | £32,850 | (calculated) |
Before finalising your cash flow forecast, there are a few things to keep in mind:
Cash flow management is crucial for business success, especially for SMEs. By actively monitoring and forecasting your cash flow, you can make informed decisions, mitigate risks, and ensure your company's long-term sustainability.
If you're looking for guidance on managing your business's finances, TAB is here to help. Our peer advisory boards provide impartial advice and support to business owners seeking better control over their cash flow, forecasting, profits, and losses.