Getting ready to build a Cash Flow Forecast

It’s time to put the theory of forecasting your cash flow into action. Here’s what you need to do before you can start building a forecast.

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1. Determine what kind of forecast is right for your business Depending on the nature of your business, you will need to forecast cash flow on a weekly or monthly basis. The frequency with which you forecast is dependent on when you get payments and send payments out.

If you’re a retailer who takes numerous payments every day, you may find weekly forecasts are necessary to get a good handle on your cash flow. However, if you take payments via invoice and most of your expenses (e.g. payroll) are paid at a specific time of the month, forecast on a monthly basis.

2. Make a list of your income and expenditure Cash flow forecasts are composed of two simple elements – your income (accounts receivable) and expenditure (accounts payable). Income elements include:

  • Sales of stock or other goods (every payment received at point of sale – by cash or card)
  • Invoices paid by clients (but only once it’s actually been paid)
  • Loans from banks or alternative finance companies such as iwoca
  • Grants, tax refunds or income from any other source

Next, prepare a list of your expenses with due dates:

  • Buying stock from suppliers (the due date is when you intend to pay invoice)
  • Wages or salaries of staff, freelancers and contractors
  • Other payroll expenses such as employer national insurance contribution
  • Office expenses such as stationary, entertainment and general expenses
  • Advertising and other marketing costs
  • Accounting and legal costs including bookkeepers, tax services and lawyers fees
  • Rent of business premises and associated business rates
  • Repayments on overdrafts, bank loans and facilities from alternative credit providers
  • Insurance payments for any cover you’ve taken out for your business
  • Taxes excluding taxes on payroll and business rates (included within other categories)
  • Other expenses covering anything not included above (quick tip: scan your old bank statements to look for costs you might have missed)

3. Make a list of assumptions The simplest way to project future cash flow is to look at your historical trading data, then create a list of assumptions of how this will change over your forecasted period. Your assumptions should take into account:

  • Seasonality in your trading history. Do your sales fluctuate over the year?
  • Sales growth over the next few months to a year. This can be tricky but a good way to start is by looking at your growth in the previous year. You might also want to model multiple scenarios (e.g. what happens if my sales grow by 50% vs. if they grow by just 10%).
  • Prices of products or services from your suppliers or other companies you work with. If these are likely to rise over the next year, you need to take this into account.
  • Timing of orders and shipments that will be required if your sales go to plan.
  • Salary increases for your employees or new hiring. Are you planning on giving anyone in your business – including yourself – a raise in the next year or will you need additional staff?
  • Other cost increases due to inflation or yearly renewal. This includes things like rent and other bills which are likely to rise year-on-year. You might also be lucky and have some cost decreases (e.g. due to economies of scale).

Once you’ve collected all of this information, you can begin to build your forecast. The hard bit is over – it’s time to simply put these numbers into our free spreadsheet which you can download in the next part of our guide.