Cash is King: a business owner's guide to the cash flow forecast

Posted by Rob Kendal on 01-Feb-2016 11:48:28

You're running your business and things seem to be going well; you're generating lots of new sales leads and winning new business which is great news, but is it sustainable?

“Of course,” you say “We have contract X, Y and Z starting this month, they make us £50,000 profit”. Then, in one swift move, a rain on your parade accountant (that’s me) comes back with “but profit doesn’t pay invoices, wages or repay bank loans…….cash does.”

So what can you do? My advice, take control! You are the most powerful asset your business has; you know it inside out, and are in the best position to produce the most valuable of all financial documents……..


Cover image to the article on how to forecast cash flow as a business owner

What is it? 

The cash flow forecast is simply a summary of all cash coming in to and going out of your business. It can be prepared on a daily, monthly or yearly basis for whatever time period you like (obviously the longer the forecast, the bigger your crystal ball needs to be!).

You may even do something similar for your personal incomings and outgoings to see how much (if anything) is left over at the end of the month or even just to make sure the basics are covered.

Why is it important?

It should go without saying that your business must make sure it has enough cash to pay invoices to suppliers and loan repayments to the bank when they fall due and, most importantly, pay its staff their wages at the end of the month.

But have you considered all of the payments that your business needs to pay? It's all too easy to overlook monies due and paid once a year as a lump sum - things like insurances, licences, subscriptions are but a few examples.

These yearly payments inevitably all fall at the same time of the year for payment, often on the anniversary of when you originally set up.

That's without mentioning VAT payments due once a quarter, the corporation tax bill once a year, your accountant’s fees, and so on.

There are many causes of cash flow problems, (here we discuss the top 3 reasons that cause a poor cash flow) and some great, simple solutions that can turn things around, but by taking the time to prepare a strong cash forecast, you can often eliminate any financial difficulties before they strike.

The forecast document will encourage you to identify every payment that will be made over the coming months so you can be confident that you have sufficient resources to meet those liabilities when they are due and your business will continue to run as smoothly as possible.

Where do I start?

I’ll let you in on a secret: the cash flow forecast is one of the most straightforward financial documents that you can produce. A spreadsheet is more than adequate to achieve the outcome you want.

The key is planning; follow these steps and your forecast will be ready in no time.

Step 1. Identify where your cash comes in from

Image of a pound coin identifying where your business money comes in fromThe main source of cash inflow will be receipts from your customers paying for the goods / services you offer. However, there are a few considerations here:

  • Is your business seasonal?
    You may find some months will generate more income than others, try to incorporate these fluctuations as best you can.
  • How do your customers pay?
    Do they pay by cash / debit card / credit card on collection which you receive immediately, or do you offer credit terms? Any credit terms will delay the cash arrival in your bank account.
    Be realistic about when this cash is likely to come into your forecast and remember some customers take some heavy duty chasing before they pay.
  • Remember the VAT!
    Don’t forget that you should include the receipts coming in including VAT that you charge on them – this is a cash flow, not a profit statement.

Other cash inflows may come from receiving a bank loan, putting some money into the business yourself, selling assets (vehicles, equipment, etc.), or rebates from HMRC for VAT.

Step 2. Identify where your cash is spent. 

Picture of a calculator representing business owners identifying where cash flow is poorYour cash outflows will certainly be the bigger list!! Any transaction that results in cash being paid out needs to be in here.

Here are some tips:

  • Review bank statements or your cash book from previous months to identify items you may have forgotten about;
  • If your business is brand new, think ahead to what you are planning on doing in the next few months. Do you have insurance, rent, subscriptions, marketing, website design, or networking fees to pay for in advance?
    Are you planning on buying a new asset (I.T. equipment, machinery, vehicles, etc.) in the near future?
  • What level of cash are you taking for yourself? Whether this is a dividend, salary or, if you are a sole trader, drawings. From a cash flow point of view they all represent the same thing, cash being paid out;
  • Don’t ignore “potential” costs, put them all in to start with. Remember this is a forecast, it hasn’t happened yet, so if you find that you need to “tighten the purse strings” after the first draft you can remove it or delay that particular cost. That’s the beauty of the cash flow forecast, it gives you control over your business’ future finances.

Step 3. Put all your cash flows into a summary

Image showing a business owner creating a cash flow summaryNow, at this stage there will be some different approaches, mainly owing to your prowess in the field of I.T.

Ideally a spreadsheet should be used because it makes it easier to move values around and it adds it up for you. For each time period you are forecasting you need to know: 

  • Total cash inflow
  • Total cash outflow
  • Net cash flow (inflow – outflow)
  • Opening balance (cash at start of month)
  • Closing balance (cash at end of month)

Step 4. Review the bottom line, not profit - literally the bottom line of the forecast

The closing balance is key, if it is negative you would be overdrawn in the business bank account at the end of that month. But remember, this is a forecast and the reason they are prepared is so you can update your plan to ensure you stay out of the red.

Review those months where you spend more than you generate. Are all of these costs essential? Can any be delayed or avoided? Could we recover our cash from customers any quicker, perhaps incentivise them with an early payment discount?

Adjust your plans to maintain a healthy cash position.


Plan your cash flow well and keep your finances happy

Often, the first draft of a cash flow forecast raises more questions than it answers. However, it makes you aware of your cash position and therefore puts you in better control, and that can only be a good thing.

As Fred Adler said (U.S. Venture Capitalist) “Happiness is a positive cash flow” and who can argue with that?!



Claire Taylor, CTF Training

This guest article was kindly supplied by Claire Taylor from CTF Training based in Hull, East Riding of Yorkshire. We'd like to thank Claire for taking time out of her busy schedule to provide us with a really helpful article.

Claire's bio

Head shot of Claire Taylor from CTF TrainingClaire Taylor FCA is a Chartered Accountant and owner of CTF Training which specialises in short financial training courses for business. With over 14 years experience teaching finance and accountancy, Claire has developed a number of one and two-day workshops covering subjects including, Understanding Business Accounts, Budgeting Effectively for Business and Managing Cash Flow.

CTF Training also delivers bespoke in-house training across all areas of finance.

For more information, you can find Claire and CTF Training on the following channels:

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Written by Rob Kendal

Rob has enjoyed a rewarding career in technology, from IT infrastructure through to software development, working with clients such as Virgin Holidays and the NHS. He understands the needs, challenges and logistics involved in making technology work for business and how to market it effectively.
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