How to make a cash flow forecast

A cash flow forecast is the best way to get a clear idea of your business’s financial position and how it’s likely to change in the near future. This guide will tell you what a forecast involves, and how you can create your own.

In this guide

• What is a cash flow forecast?
• Why do I need a cash flow forecast?
• How to make a cash flow forecast
• How long does a cash flow forecast
• How can I improve my cash flow?

What is a cash flow forecast?

A cash flow forecast is a simple way to clearly lay out the money “flowing” into and out of your business. It tracks projected income and outgoing money across a set time period – the timeframe you use will depend on what you need the forecast for.

There are two main types of cash flow forecast: direct and indirect.

Direct forecasts, sometimes known as the “receipts and disbursements” method, cover shorter periods of time – usually 90 days or fewer. Inputs for a direct cash flow forecast generally focus on upcoming payments and receipts organised by timeframes like days, weeks, or months.

Indirect cash forecasts are mostly over a long amount of time, created from projected income statements and balance sheets. They’re more frequently used as it’s simpler to complete, using the profit and loss sheet and the balance sheet. They can show the amount of money required for growth and projects over the long-term, but aren’t always as accurate for short or medium-term projects.

Neither method is better than the other – there are different uses for direct and indirect cash flow forecasts, meaning you should consider which is best for you before creating one. For simple cash flow forecasts when you’re just starting out, however, you can follow our method below to put together a clear view of your company’s financial position.

Why do I need a cash flow forecast?

There are various reports and forecasts available to businesses for keeping track of their finances. So why do businesses use cash flow forecasts?

• To make sure suppliers and employees are paid on time
• As an early warning for future financial issues
• To support financial decision-making and provide an understanding of business performance
• To provide to banks or investors looking to provide a loan or investment

To make sure suppliers and employees are paid on time – making regular payments to suppliers and managing an employee’s salary are of course vital components of a business’s day-to-day work. But if you face financial difficulties without warning, you might find that you’re lacking the available cash to make those payments. A forecast can predict when you’ll need more working capital, so you can plan ways to meet the need, like a business loan.

As an early warning for future financial issues – when finances are going through a period of change, making steady payments can sometimes become an issue. You can start to tackle these problems in advance with cash flow forecasts as they provide an insight into future issues, allowing you to plan ahead.

To support financial decision-making and provide an understanding of business performance – a cash flow forecast is a good way to visualise income and expenses over the foreseeable future, this allows you to know whether you can make big purchases, such as office space, or hire new staff. You can also see if performance is likely to peak and dip seasonally.

To provide to banks or investors looking to provide a loan or investment – many finance providers will want to look at a business’s cash flow before providing a loan or investment.

How to make a cash flow forecast

1. Identify your future income (both sales and non-sales income)
2. Identify your future expenditure (spend, repayments, purchases)
3. List any assumptions based on historical trading data
4. Fill out a cash flow forecast spreadsheet

(1.) Identify your future income (both sales and non-sales income) Once you’re ready to start preparing your cash flow forecast, start by making a note of all your projected income. This is both from sales and service payments – depending on what your business offers – and from other sources, such as tax refunds, and loans from banks or alternative finance companies like iwoca. The more detail you have, the more accurate your forecast will be.

(2.) Identify your future expenditure (spend, repayments, purchases) In the same way as for your income, make a note of all your outgoing payments. These might include paying suppliers, employees, or making repayments on business loans. Make sure you don’t miss anything, or you might think you have more money than you really do! Some of the other expenses you should remember to include might be:

• Payroll expenses beyond salaries, like national insurance contributions
• Advertising and marketing payments
• Office expenses including stationary and entertainment
• Accounting costs like bookkeepers and tax services
• Legal fees
• Rent
• Insurance payments
• Taxes

(3.) List any assumptions based on historical trading data If you’re right at the start of launching your business, you might not have any trading data on your own company – but any information that you can find can help you make some initial plans. Even if you don’t have any information yourself, you can use what you know about competitors and companies that you work with, like potential suppliers and customers, to guess at how finances might move around.

• Particular things to look out for are:
• Fluctuating sales throughout the year
• Business growth over time (it might also be useful to model this with several different growth options)
• Changing prices by suppliers or partner companies
• Timing of orders and shipments
• New hires, salary changes, and bonuses
• Inflation, rising costs (like rent or bills)
• Any decreases in cost due to scale

(4.) Fill out a cash flow forecast spreadsheet There are many different cash flow forecast spreadsheet templates available online, meaning that you don’t need to start from scratch to get your finances in order. There are also a small number of apps and software options that can help build cash flow forecasts, including Brixx and Fluidly – which can be a great way to make your first forecast if you want a more in-depth option with greater support.

Top tips for filling out a cash flow forecast:

• When writing down your expenses, have a quick look at your old bank statements to look for costs you might have missed.
• Include an additional cost of 10%-20% of recorded costs in order to give yourself a “buffer” in planning; this is particularly useful for preventing investors challenging you for under-costing your business!
• As well as spreadsheets, it’s possible to produce cash flow forecasts with modern software that does the job for you, like brixx.com – which can save a lot of time and effort.

How long does a cash flow forecast take to make?

While a forecast will vary dramatically based on the business, a cash flow forecast is likely to take:

• For a start-up at the idea stage – 2-8 hours for a 1-3 year projection, as data is limited prior to launch.
• For a company at the Series A-B funding stage – 3-5 days to make sure the forecast is accurate enough to persuade investors.
• For an established business – 2-8 hours per month.

How can I improve my cash flow?

If you’ve finished your cash flow forecast and it’s turned out that you might need some additional finances in the future, you may want to consider checking your eligibility for a business loan or alternative means of funding. If you’d like to learn further about the funding options that could be open to you, then why not have our deeper read of our Finance explained section?

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