When you’re running and growing a successful business, life is much easier if you always keep a close eye on your cash flow. Knowing what’s coming in and out of your business, and when, can help a business owner plan much more effectively.
But before we dig into the details, let’s start with the basics of what we’re working with here.
What exactly is cash flow?
Cash flow is the flow of cash in and out of your business – it really is as simple as it sounds. Money coming in might be from sales, grants, or other income. Money going out might be for paying suppliers, expenses, salaries, or rent.
As a business it’s so important to strike a healthy cash flow balance of in versus out. You need what’s coming in to cover what’s going out, and more if you’re going to see a growing profit.
Analysing patterns in spending and income will help you forecast cashflow for the weeks and months ahead. It can help a business be more proactive about spotting approaching pinch points, so they can take earlier action.
How to create a cash flow forecast
There are a whole host of sales and cash flow forecast templates online that can make the process simpler. If you have an accountant, then this is something that they can help you with.
Some cloud-based bookkeeping software will also include cashflow forecast reporting, with the figures updated in real-time from your bookkeeping data.
Pick your timing
When it comes to preparing your cash flow forecast, the first thing you’ll need to decide is what period you want to monitor. The typical approach is monthly, but businesses who want to drill down more specifically might choose to create a weekly forecast alongside it, so they can be even more responsive.
While an annual forecast is certainly a useful addition to your toolkit, especially when you’re looking at long term plans, it’s generally wise to use this alongside more regular forecasting too.
What should be included in a cash flow forecast?
Once you know what period you want to stick under the spotlight, you can get to work on identifying patterns and making your predictions. This should include three main factors: sales, other sources of income, and estimated outgoings.
Sales
Did your sales increase, decrease, or stay the same over your target time period? What trends or trajectories can you spot that indicate what future sales figures might look like? This is all about analysing your existing sales history to start building a bigger picture.
Don’t forget though, sales figures are hugely impacted by variables such as:
- Seasonal peaks and troughs in customer activity
- Marketing promotions
- New product launches
- Market demands
- Competitor activity
- Overall status of the economy
This means you can’t apply a cookie-cutter approach and expect one period to be the same as the last in terms of its trajectory. However, a sales forecast does still provide an informative, general indication of trends.
Other income
As we mentioned earlier, other sources of income outside of sales will differ from business to business. Common reasons you might have additional money flowing inwards include:
- Tax refunds
- Grant payments
- Investment (from various sources)
- Asset sales
These are all important factors that will give more depth to your cashflow forecast, and make it a more useful document.
When considering both sales and other income, it’s important to allow a buffer for late payments as this will impact the timings of your forecast.
Outgoings
This refers to your projected costs and expenditure. How much are you expecting to spend over your target period, when, and on what? How does this measure up to the estimated amounts flowing in through sales and income?
This includes everything from fixed costs (business rates, fees, tax payments, wages, loan repayments, through to your variable costs and beyond.
Don’t forget to fact-check!
Once you create a forecast, it’s incredibly useful to revisit what actually happened once the forecast period has elapsed. This will help determine the validity of your forecasting and highlight where you might need to make improvements next time.
Why is it so important for you to understand your cash flow?
As you can see, a cash flow forecast is a lot like having a traffic manager for your financial accounts. With all the information documented meticulously, you can make educated projections about your finances, which in turn will make for more informed decision-making in general.
When you can start building a detailed picture around what your future income and outgoings might look like, you can recruit, invest, and grow the business with more confidence. You’ll get a better idea of when you can spend more freely versus when you need to hold back.
Sales and cash flow forecasts are also great tools to have under your belt when it comes to pitching for investment or applying for loans. If you can show that they’re based on reality and careful consideration, they’ll serve as a great way to prove your ability to make any necessary repayments.
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