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Cashflow management: forecasting

Cashflow is both a key component of financial management and the lifeblood of any business. Keeping control of yours can help maintain a stable financial position and aid future success and growth.

By managing your cashflow, you should be able to estimate the amount of cash that you’ll need to have available at any given time, anticipate trends in sales and expenditures and evaluate when there may be a shortfall or cash surplus. To help you keep your cashflow healthy, creating a plan from the outset can help you pre-empt these situations.

Creating a cashflow forecast

This means predicting the movement of cash in and out of your business over a specified time, anticipating fluctuations in your payables and receivables and planning and allocating money properly1. In its simplest form, a forecast could be a detailed Excel spreadsheet. Your plan can cover any length of time, from a week to 5 years - just make sure the chosen period works for you. There’s also software available if you prefer to manage it without having to use a spreadsheet.

Why create a forecast?

Forecasting your income and expenditures in advance will help you:

  • Ensure you’ve budgeted for seasonal and other changes that could impact your sales.
  • Allocate your money effectively and spot opportunities to cut down spending.
  • Assess if you need to borrow money.
  • Make sure you’re able to afford all your planned business activity.
  • Identify gaps and cash shortfalls before they become a problem.
  • Evaluate your customer payment terms.

Forecasting vs budgeting

While forecasting your inflows and outflows will involve some level of budgeting, a good forecast should track exactly when expenditures are due to occur (predicted or actual) and when income is due to come in (and in what volume). A forecast is based largely on developing or historic trends, estimations, and adjustments in line with sales.

How far in advance should you forecast?

You can forecast as far in advance as you want and break it out by any time period. You could forecast a complete financial year in advance, detailing each month separately. If you’re starting out, you may find it easier to manage your cashflow week by week.

Where to start

When you’re starting out, cashflow management can appear a daunting task.  Start with the information you do have on what the costs of running your business will be. A lot of this will be in your business plan. Firstly, you need to know how much money you have to begin with. Whether you’ve already allocated it to your start-up budget or not, note it down.

What else goes into a cashflow forecast?

To make things simpler, you might want to split your forecast out by income and expenditure, listing the associated costs of each.

  • Some of these may be covered in working out how much funding you have available at the start of the forecast period, but if you’re expecting additional income from other sources, put them into the forecast.

    It’s unlikely that your income from customer sales will come in at the exact same amount each month, so your forecast should always allow for this. Think about periods when you expect sales to be high (this could be in the weeks leading up to Christmas if you’re in the retail sector) and when they might be low (if you’re a contract builder, you might have less work during the winter).

    If you intend to launch marketing or advertising campaigns in certain months, don’t forget to estimate what boost you expect in sales and incorporate this into your forecast.

    Other sources of income might include grants, donations, loans, or your own personal investments. And if new sources occur, always factor them into your plan.

  • Fixed costs

    Once you’ve input this information, think of any fixed costs (often referred to as overheads) that you know will be going out during the period and won’t be changing in the short term, for example if you need to pay rent on your business premises on the same date each month, make sure you include this in each step of the forecast.

    Fixed costs will often make up the bulk of your business expenses, and may include:

    • Utility bills if fixed (electricity, gas, water, phone bills)
    • Loan repayments, including interest charges
    • Staff salaries / direct labour
    • Insurance
    • Taxes and Contributions (National Insurance, Employee Contributions)

    Variable costs

    Your variable costs will rise and fall in line with your sales and production levels and will make up a key component of your forecast, despite being the most difficult to pre-empt. Variable costs are generally anything relating to the product or distribution of your goods or services. Common variable costs that may be applicable to your business include:

    • Production costs (of your product)
    • Billable staff wages
    • Commissions
    • Credit card fees
    • Freight / shipping and packaging
    • Travel

    When trying to work out your variable costs, think of anything impacted by a change in sales. If you’re planning to boost your sales with an advertising campaign, make sure you’ve allocated enough money to produce extra goods and pay extra staff. Don’t assume that sales profits will cover everything.

    Note: If you’re a start up, you may have some additional upfront costs (fixed and variable) to get your business off the ground that should be included e.g. a deposit on business premises.

Allocating extra money

Once you have the basis of your forecast, it’s wise to make sure you have additional funding available if something unexpected arises.

Reading the forecast

Once you’ve input all income sources and expenditures into your forecast, don’t leave it untouched until the next financial year. It’s important to regularly monitor how your financials are faring against the forecast. Look out for any potential cashflow gaps and make adjustments.

Five key metrics that you may want to keep an eye on month to month:

  • Total inflow

    This is the total coming into the business from your income sources above and entering the cash flow cycle.

  • Total outgoings

    The sum of all expenditures and outgoing each month (or chosen timeframe).

  • Net cashflow

    Your net cashflow is the difference between your inflows and outflows in any given period and represents how much money you have in your cash flow cycle. Net cashflow is a useful metric in determining the short term financial stability of your business. Note: Your net cashflow is not the same as profit.

  • Opening balance

    The total spendable cash available at the beginning of the period (typically a month).

  • Closing balance

    The sum of cash and bank balances at the end of the month, which then become the opening balance the following month.

Actual figures

To measure how accurately and efficiently your business is performing against your forecast, input your actual figures against your original numbers. The sooner you do this the better, as it will help to spot areas of overspending, gaps developing in the cycle and instances where you may need to adjust your plan.

Five tips to better forecasting

With a forecast in place, here are five tips to help your ongoing cash flow management:

  1. Make sure your forecast is still realistic after your first few weeks operating and check that you haven’t under or overestimated your costs.
  2. Look for opportunities to reduce your fixed costs such as utility bills. This can increase your amount of available cash.
  3. Build good relations with your clients and suppliers in case you need some leniency later.
  4. Make your payment terms work for you. If the lag between making the sale and receiving a customer’s payment is making it difficult to stay ahead of your expenses, think about shortening them.
  5. Make it as easy as possible for customers to pay you. Invoicing as soon as possible and accepting online payments could all ensure faster payments and a smoother flow.

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