A good cash flow forecast is essential for any business owner looking to understand the health of their company and gain insights into its future performance. Discover practical tips for creating your own cash flow forecast and how it impacts your business thinking.
Approximately 57% of UK small business owners have experienced problems with cash flow, according to The State of Small Business Cash Flow report by Intuit QuickBooks.
As Carl Reader, chairman of business advisory firm d&t puts it, “Your cash flow forecast needs to be updated regularly with the changes happening not just in your business, but reflecting changes in the outside world too.”
What is a cash flow forecast?
A cash flow forecast is a resource that shows what money is coming into a business from its day-to-day activities, and what needs to go out. Its purpose is to help you predict future income and expenditure and best formatted as a spreadsheet or online document. Having a cash flow forecast prevents you from making decisions on a whim, and therefore placing your company’s ability to trade at risk.
What is the purpose of a cash flow forecast?
A cash flow forecast will help you determine the short-term viability of the day-to-day running of the business, particularly with paying bills, hiring additional staff, budgeting for expansion and buying new equipment.
“The purpose of a cash flow forecast is to aid decision making,” says Paul Barnes, MD of MAP, an outsourced finance function for UK digital creative agencies. “And to maximise its usefulness to you, you should be checking it on a weekly basis, to identify risks of wastage or cash flow issues.”
What makes a good cash flow forecast?
A good cash flow forecast should be:
- Easy to maintain
- Always obvious how to gather the information required
- Reliable – all spend and incomings are carefully considered so that nothing is missing or inaccurate
Why are cash flow forecasts important to a business?
Cash flow forecasts are important to your business because they help you identify potential risks where you could run out of cash and become unable to deliver on your committed expenditure.
Good cash flow forecasts allow you to pick out any wastage (i.e. money being paid out for things that are not required) and encourage business owners to beef up their credit control processes and collect cash owed on time.
38% of small business owners who have suffered cash flow problems have been left unable to pay debts, according to The State of Small Business Cash Flow report by Intuit Quickbooks.
“Review your debtors at least once a week and allocate time to make phone calls to get the cash in,” advises Peter Czapp, Co-CEO of accountancy firm The Wow Company. “If you’re not comfortable doing it, find someone that is. It's also really important to take action with bad debts.”
You will have patches when unexpected expenses arise or invoices are paid late. The good news is that our range of American Express® Business Cards has been developed with you, the business owner, in mind. For example, you have up to 54 days to clear your Card balance, so you can keep your money in your business for longer and pay your expenses when it suits your business best¹.
What tools should you use to help with your cash flow forecast
There are many templates available online to support you in completing your cash flow forecast, including this one from American Express and others such as CashFlow with built-in formulas. Many accounting software applications such as QuickBooks will also have cash flow forecasting features too.
How to do a cash flow forecast for your business
What should you include in a cash flow forecast to make it really deliver for you? The keyword here is completeness. Include everything that could possibly leave the bank account, from tax to director dividends, loan repayments, bank charges as well as your trading expenses (e.g. salaries, marketing, office costs like heat and power and rates, all business travel outgoings).
“When calculating incoming cash, make sure to include the VAT charged and anything else that you might have received, such as bank interest and refunds,” says MAP’s Barnes.
Cross-reference your revenue sources and your overheads with months as your headings, and have a totals box factored in for each month with a formula to work out the difference between your incomings and overheads. Fill in as much detail as you can, predicting sales, large purchases and expenses where necessary, making sure you:
- Enter the balance of your bank account(s) on the day that you want the forecasting to begin
- Use the historical transactions from your bank account(s) to guide the basis of the future expected transactions in and out of the bank
- Check your accounting system for any sales or purchase invoices that are awaiting payment and enter their value into your forecast for the dates they are expected to be paid
- Look at budgets and purchase orders and speak to other people in the business to gain an understanding of what other spend is expected
How often should you update your cash flow forecast
Update your cash flow forecast anytime something changes, for example, you sign a new supplier or hire another employee. Most cash flow forecasts look 12 months into the future. We recommend also working with a more accurate rolling 13-week forecast that includes your quarterly VAT bill.
How to use your cash flow forecast
Once you have completed your cash flow forecast, you can see where there may be shortfalls or a surplus. For example, you can predict how big an impact a recurring annual payment will have and whether you have enough to cover this.
“Having a good cash flow forecast in difficult economic times meant that our business stayed on track with our revenue projections,” says Kaye Sotomi, Founder and Director of Chop Chop London LTD. “We realised we had to do two things: increase our prices and diversify our service offering with other services that had a higher premium.”
A great cash flow forecast is the best way of getting to know the health of your business. For more cash flow tips for SMEs visit our guide for the methods to improve cash flow, including how to incentivise quicker payment terms with your customers and longer payment terms with suppliers.
Discover our range of American Express Business Cards with benefits that help finance your business and manage your cash flow more effectively. You’ll also get Membership Rewards® points² that you can use on a wide range of perks and gifts for you, your business and your team.
- The maximum payment period on purchases is up to 54 calendar days on Gold & Platinum Business Charge Cards and 42 calendar days on the Basic Business Charge Card, it is obtained only if you spend on the first day of the new statement period and repay the balance in full on the due date.
- Membership Rewards points are earned on every full £1 spent and charged, per transaction. Terms and conditions apply.