Tips for Cash Flow Forecasting

Being able to put together a forecast of your business’ cash flow is incredibly important for planning and identifying problem areas. This is especially true in times of crisis when your cash flow comes under pressure.

In this article, we outline some of our tips for building a cash flow forecast.

Understanding your cash flow

In terms of putting together your forecast, it’s usually best to use a spreadsheet so that you can visualise everything in one place and make the necessary calculations. Many small businesses use accounting software to record financial data such as transactions. If this is the case, you should investigate whether you can export that data into a spreadsheet as this will give you a basis for the forecast.

When it comes to the timeline for the forecast, that depends on your personal preference. We would typically suggest breaking it down monthly so you can extend it as long as you like.

It’s important to understand that a cash flow forecast is not a profit and loss account, but rather an outline of all cash coming in and out.

Areas to outline

Sales

The first thing to outline in your cash flow forecast is your sales. It’s important to remember that the amount in this row will be determined by the date your sales invoice is expected to be paid, not the date you raise the sales invoice. If you are a cash business, this will be your expected sales for each month.

Fixed costs

As the name suggests, these are the costs that will be outgoing regardless of how many sales you make that month. Common examples of fixed costs include employee salaries, office rent, bills, and payments for any software your business relies upon on a regular basis. Make sure you review the terms for any invoices and allocate these to the correct month.

Variable costs

Variable costs are those that correspond with your expected sales for each month. You can work these out by looking at the historical cost of these compared to your sales in past months.

Here, it is important that you consider the terms with each supplier. Whether it’s 30 days or 90 days can make a big difference to your cash flow!

One-off purchases

It’s also necessary to plot out any big one-off purchases in the correct place in your forecast, such as a piece of new equipment or some new office furniture.

VAT

If you are VAT registered, you will need to include your monthly/quarterly VAT payment in the cash flow forecast. If you deferred your VAT payment in line with the government COVID-19 support for businesses, please note that this will be payable by the 31st March 2021.

Corporation tax

If you are operating as a company, you will need to include your corporation tax payments. These will be due 9 months and 1 day after your company’s year-end.

So, those are our tips for preparing your cash flow forecast. Once you have prepared the cash flow forecast, you will be in a much better position as you can predict any pinch points and have time to obtain funding if you need to!

About Dan Routcliffe

Dan Routcliffe is the Client Services Director at Sidaways, a forward-thinking chartered accounting firm based in Exeter.