How to prepare a cash flow forecast

A version of this article was first published here in Nov 2022 

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Managing your money as a small business owner or sole trader can seem overwhelming. You didn’t go into business to become an expert in accounting or bookkeeping, but keeping a close eye on your finances is crucial.

We’ll explain what a cash flow forecast is and how you can use one to improve your business’ cash flow.

What is a cash flow forecast?

A cash flow forecast shows what money is going in and out of your business, helping you to manage your working capital effectively. It’s an important part of your business plan.

Why is forecasting important?

If you’ve got a clear understanding of what you’re earning and spending every month, you’ll be in a better position to manage your cash flow.

You’ll be able to:

• Better understand your financial position
• Easily identify any shortfalls
• Ensure you can make payments to suppliers or employees
• Provide it to banks when applying for business loans
• See the financial health of your business

Five steps to create a cash flow forecast

1. Choose your planning period

Decide how far ahead you want to plan your cash flow projection. Cash flow forecasts can span weeks, months, or even a year. The time frame should align with your cash flow cycle and your ability to make accurate predictions.

• For established businesses: Use historical data to anticipate income and expenses.
• For new businesses: Recognise that longer forecasts may be less precise.

Remember, your cash flow forecast is a living document. Update it regularly as circumstances change or more accurate estimates become available.

2. List your income

Create a clear view of all the money coming into your business. Organise it by week or month, with a column for each time period and rows for each income type.

Include:

• Sales revenue (recorded when payments are received, not when invoices are sent).
• Non-sales income, such as:
  • Tax refunds.
  • Grants.
  • Investments from shareholders or owners.
  • Royalties or licensing fees.

Add up all income sources for each column to calculate your total income.

3. Identify your expenses

Now, list all the outgoings for your business. For each week or month, break your expenses into categories to ensure nothing is overlooked.

Include:

• Fixed costs: Rent, salaries, loan repayments.
• Variable costs: Raw materials, marketing, and advertising spend.
• Irregular costs: Tax bills, one-off purchases, or maintenance fees.

Add up these expenses for each period to determine your total net outgoings amount.

4. Calculate your net cash flow

Subtract your total expenses from your total income for each week or month.

• Positive cash flow: More money coming in than going out—this signals stability or room to invest.
• Negative cash flow: More money going out than coming in—this could indicate the need for adjustments or additional funding.

To get a complete picture, maintain a running balance across your forecast. Prolonged periods of negative cash flow might require contingency planning, such as securing financing or negotiating payment terms with suppliers.

5. Regularly monitor and adjust

Your cash flow forecast should evolve with your business. Regularly review it to ensure it reflects current realities. Key moments to revisit your own cash flow forecast include:

• After major business changes (e.g., launching a new product or service).
• When market conditions shift.
• To prepare for seasonal variations in revenue.

Consider using software tools like Excel or dedicated accounting platforms to streamline the process. These can automatically recalculate your full cash flow statement when you update income or expenses.

How to track your income

The money coming into your business is split into two main categories – sales income and non-sales income.

Sales income

A sales forecast is prepared to identify the value of goods or services that your business expects in a given period.  It shows when sales are a made or services are provided.

By using this sales forecast, along with details of the credit terms offered to customers, you can begin to forecast cash receipts.

What is a cash receipt?

A cash receipt is an amount of money received by a business. It could be a customer paying for goods or services, interest on investments or additional funding paid in.

A cash receipts forecast considers when the money for those sales is paid by the customer. It’s useful to ask yourself some key questions to help your predictions:

Do you offer credit terms?

If you let customers pay for goods or services within 30 days of the invoice date, then the cash receipts forecast will show funds coming in to the business the month following the provision of services or sale of goods.

If you offer a variety of credit terms, then you need to take this into account.

When do your customers pay?

Even if you offer certain credit terms, you may have specific customers who pay early or late. Looking at previous sales and payment records will help to identify these trends and help you to build this into your cash receipts forecast.

Are you VAT registered?

If your business is VAT registered, then your sales forecast will show income exclusive of VAT. However, your cash receipts should show income inclusive of VAT, as this is the value your customer will be paying.

Non-sales income

Not all your income might come from sales, including bank loans, interest or any rent you might receive. Whilst regular monthly receipts may be easy to forecast, don’t forget about any one-off receipts.

You need to consider any additional funding sources you have and record when you expect to receive this money.

How to track your expenses

After forecasting your sales, you need to consider the cost of producing the goods or supplying the services to meet that level of sales. To forecast cash payments, you need to consider all costs that relate to your operations. Reviewing your bank statements should help you to identify and forecast these cash payments.

Direct costs

This includes direct costs of producing the goods or supplying the services, such as:

• Materials
• Employee wages
• Packaging
• Advertising

Indirect costs

Some indirect costs may be paid on a monthly basis, such as:

• Rent
• Utilities
• Travel costs
• Phone bills
• Any incidental expenses

Keeping on top of your cash

Regularly updating your forecasts and monitoring your finances will help you to know if you’re in line with your predictions, and act as soon as possible.

Take control of your finances

Creating and maintaining a cash flow forecast is a crucial step towards ensuring the financial health of your business. By carefully tracking income and expenses, making realistic predictions, and regularly updating your forecasts, you’ll gain a clear understanding of your financial position. This empowers you to make informed decisions, anticipate challenges, and seize opportunities as they arise.

Remember, cash flow planning is an ongoing process. With the right tools and practices, you can confidently navigate your business’s financial journey.

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