How to do a cash flow forecast

Preparing an accurate cash flow forecast should be a top priority for your business as it helps to make sure you have enough cash to survive and thrive. Cash is king as the saying goes – and any business will struggle to keep its doors open for long without it, even if they stand to profit in the future.  

But what if you don’t have a strong accounting background? Analysing numbers and pulling together reports can seem intimidating at first, yet cash flow forecasting is simpler than it sounds. Read on to find out:

·       What a cash flow forecast is

·       Why cash flow forecasting is important

·       What a cash flow forecast includes

·       How to do a cash flow forecast

·       What you can use to build a cash flow forecast

·       5 tips for making your forecast as useful and reliable as possible

What is a cash flow forecast?

Simply put, a cash flow forecast is a prediction of the cash your business will have coming in and going out over a specific period of time. This includes income from sales and other sources like loans as well as regular outgoings such as staff salaries, rent and materials.

You’ll ideally make your forecast based on historical cash flow figures plus any upcoming business plans and emerging market trends. A typical forecast looks ahead by one year – though they can be shorter or longer term too.

An accurate cash flow forecast can be a useful tool for understanding when your business is likely to have cash available and when it might not. It should work in tandem with your business plan as a result by highlighting opportunities as well as any financial challenges that could get in the way of achieving your targets.  

Why is a cash flow forecast important?

So how exactly can a cash flow forecast help your business? There are three key reasons to put one together.

• 1.It can prevent cash shortages
• 2.It helps you plan for growth
• 3.It provides a clear picture of your financial health

Cash flow is the lifeblood of every business. You need it on hand from month to month to cover your bills, pay your staff and keep operating. Forecasting cash flow allows you to see if and when you might run out of cash so you can plan ahead and take action to avoid disaster.

That might mean cutting overheads, increasing revenue or finding new investment.  

What about when business is booming? Cash flow planning also allows you to gauge your spending power when looking to grow.

You could have ambitions to develop new products, expand to bigger premises or hire more staff. An accurate cash flow forecast will tell you when you’ll have the necessary cash to do so.

Cash flow forecasts don’t only provide confidence for the business owner. Other parties may want to see a forecast when digging deeper into your business’ performance and potential before deciding to work with you.

That includes banks and alternative lenders when applying for credit, as well as potential investors. This element may influence how optimistic your forecast is – but it’s important to keep it realistic and accurate. 

What to include in a cash flow forecast

At a basic level, your cash flow forecast should include all your likely income and outgoings in the time period you’re planning for.

Your income will include things like:

·       Sales

·       Tax refunds

·       Grants

·       Shareholder investments

·       Royalties

·       External finance

Your business’ outgoings meanwhile could include:

• Rent
• Staff salaries
• Raw materials
• Assets
• Credit repayments and fees
• Marketing
• Tax bills

It’s important to note the dates that cash will actually go in or out of your business, rather than when you send invoices out or first incur costs. This will make sure your forecast accurately reflects when you’ll have cash available instead of when it’s promised.

How to do a cash flow forecast

So how do you pull all that information together and turn it into something useful?

Step 1. Estimate your income

Start by estimating the sales your business is likely to make over the coming weeks and months. You can refer to previous sales data if you’re lucky enough to have been in business for a while.

It’s important to consider seasonal changes as most businesses experience busy and quiet periods. If you’re just starting out, try consulting industry experts and customer surveys to get an idea of what to expect.  

Are there competitors who could make gains this year, thanks to a new product for example? If so, it’s worth factoring this in to your sales forecast too. Failing to predict a change in market share can cause problems later down the line. 

Work out what you can expect to come into your business based on this sales forecast as well as other known income such as tax refunds, investments and loans. 

Step 2. Estimate your outgoings

Next is working out the likely costs you’ll be paying out, factoring in both fixed and variable ones.

There will be set costs that you pay consistently regardless of overall performance, such as rent, salaries and other factors like equipment hire. Variable costs such as raw materials and packaging meanwhile go up and down depending on your production or sales volume, which may be affected by seasonality.

Try to accurately record variable costs instead of using an average figure.

Step 3. Subtract the net outgoings from your net income

The final step is to subtract all your business’ outgoings from its incomings to see what cash you have left to work with.

This will be either positive cash flow, meaning you have more cash than you’re spending, or negative cash flow, which is the opposite. The resulting figure will allow you to make both monthly and annual cash flow forecasts.  

How to build a cash flow forecast

You’ve got various options for putting together cash flow forecasts depending on your confidence, time and financial resources. Your main options are:

·       Paying for accounting software to track cash flow and create forecasts automatically. Different tools will come with different features and price points, so make sure to compare your options.    

·       Creating your own templates using tools like Microsoft Excel or Google Sheets. You could take influence from basic templates available online.  

·       Hiring a professional accountant or internal finance experts to create cash flow forecasts for you.

How to improve your cash flow forecast – 5 key tips

A cash flow forecast should be a dynamic document that you update and improve over time. Here are five tips for making your cash flow forecast as helpful and reliable as possible.

Decide how far ahead to forecast

Cash flow forecasting can cover anywhere from next week into next year. What’s important to bear in mind is that the longer you forecast, the less likely it is to be accurate – particularly if you’re a young business with little historical data to go on.

Planning one year ahead is a useful target to aim for if you can.

Be realistic

It can be tempting to be overoptimistic in your forecasting, particularly if aiming to impress a lender or investor. Unfounded estimates or oversights could cause serious problems with your cash flow if things don’t entirely go to plan though.

If using your forecast to make important business decisions, consider giving yourself a cash buffer to protect against unexpected costs.

Factor in payment terms

We mentioned above how it’s important to use actual payment dates rather than basing your forecast on sending or receiving invoices. Long payment terms in particular can cause cash flow problems, so make sure to use dates when you know your customers will pay to judge when you’ll have cash.

Review your forecast regularly

New information around opportunities and challenges can also make your forecast more practical. Make sure to review and update your forecast regularly to make sure it reflects your current situation and remains fit for purpose.

Model different scenarios

If you really want to test things out, it could be useful to create different versions of your cash flow forecast to reflect the best and worst possible scenarios. While running a business will always be somewhat unpredictable, this modelling will better prepare you for all eventualities.

Plan for better cash flow with Nucleus

Knowing how to do a cash flow forecast will empower you to make qualified decisions and approach the future with confidence.

If you’ve spotted a shortfall or growth opportunity, we’ve already helped thousands of UK businesses to boost their cash flow. You could get an unsecured loan of up to £250,000 to help you even out seasonal peaks, bridge long payment terms or fulfil your growth plans.

Read more about our Cash Flow Finance or get in touch with our cash flow experts about the funding your business needs.