Tax & admin · 5 February 2018

How to prepare a cash flow forecast for your small business

Positive cash flow is crucial to the survival of a business

Finishing his latest Business Advice series, Grid Law founder David Walker provides a guide for a simple cash flow forecast that will help establish long-term financial stability at a small company.

A 13-week cash flow forecast is one of the best tools you can use to spot potential financial problems in your business.

As the name suggests, cash flow forecasting is a process by which you forecast what cash is flowing through your business. You’re predicting what money is coming in, what’s going out and when this is happening so you can manage it accordingly.

Despite beings such a vitally important task, cash flow forecasting is a task that’s often overlooked by small businesses. They think it’s a job for their accountant, but it’s not. It’s a job for you. But you don’t need any accountancy or financial skills to prepare a cash flow forecast. All you need is a basic knowledge of using spreadsheets and be able to enter data accurately.

Why should every business prepare a cash flow forecast?

You need sufficient cash coming into your business to cover all of your overheads and to pay your staff and suppliers. If you don’t have sufficient cash coming in to cover your bills as they fall due, your business will be insolvent and will be forced to close.

Therefore, you must concentrate your efforts on generating positive cash flow for your business. This means there must be more cash coming in than going out. However, cash must be coming in profitably if you’re to have a sustainable business.

As explained in my previous article, you can generate short-term cash flow by having a sale to clear out old stock. But, if you’re not selling your products or services at a profit, your business will not last.

How to prepare a simple cash flow forecast

I use a 13-week cash flow forecast in each of my businesses and I would suggest this is the right period for most businesses. It enables you to look far enough into the future to ensure you know what is happening, but not so far ahead that the predictions aren’t accurate.

The forecast needs to be updated on a weekly basis (I do mine as one of my first jobs on a Monday morning) and as each week passes I delete the previous week and add another week to the forecast. It doesn’t matter when you choose to update your cash flow forecast, but it works best the more consistent you are in keeping it updated.

In the first column of my spreadsheet I have a list of headings.

These start with “Opening balance” which is the balance in your bank account on Monday morning.

The next heading is “income”, and the next heading under that is “expenses”.

Personally, I list all my expenses separately but some can be grouped together to make it more manageable. For example, I would list payroll as one expense if you pay all your staff on the same day. I wouldn’t list each employee individually. The final heading after you have listed all your expenses is your “closing balance”.

Then, each week has a separate column.

Each weekly column starts with the opening balance, then to this you add the income you expect to receive this week. I add all the expected income together, rather than listing each individual invoice I expect to be paid.

Then you subtract all the expenses you expect to pay in the week and at the bottom is the expected closing balance. The closing balance is the expected balance in your bank account if all the income comes in on time and you pay all your expenses on time.

The closing balance then gets carried forward to the opening balance of the following week and you repeat the process.

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Lingerie tycoon Caprice Bourret: “Cash flow is your bible”

Caprice Bourret has gone from model to entrepreneur, establishing a successful lingerie line as the CEO and founder of By Caprice in 2006.

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Calculating expenses

You will have some regular expenses which come out of your account at the same time each month, for example rent, payroll, any subscriptions you have etc. These are easy to predict and add into the spreadsheet.

Other expenses are less regular so you will add these in when you receive an invoice from a supplier. For example, if the payment terms are 30 days you can add it into the spreadsheet in the relevant week so you know when it has to be paid.

Income works in exactly the same way. You may have some regular income that you know is coming in each month which can be added into the spreadsheet at the relevant points.

Then, whenever you issue an invoice you add it in to the point when you expect payment.

Now, be careful here. You don’t add the income to the spreadsheet on the due date unless you are confident your client will pay on time. If you know your client is a slow payer, you must add it in at the point you expect to receive the income. This might be 60 or 90 days later.

If your business doesn’t work on an invoice basis you would estimate what you weekly sales are likely to be and add this figure in instead. Each week you would then amend the spreadsheet to reflect what your sales actually were.

When you have completed as much detail as possible, you then review your cash flow forecast on a weekly basis and make adjustments as necessary. For example, if you expected income to be received but it’s late, or if you have expenses you haven’t paid on time, you move them to the next column. If you were expecting to make a purchase in a month’s time but you have made it early, you bring it forward and so on.

The closing balance

You may also find that the closing balance on your cash flow forecast doesn’t exactly match your bank balance at the end of the week. If it’s just a few pounds out, don’t worry. Update your opening balance on the spreadsheet at the beginning of the next week.

If the closing balance is significantly different to your bank account balance it could indicate that you have missed some expenses or income. So, take a closer look at your spreadsheet to find out what the problem is.

When you can predict any shortfalls in cash you can plan accordingly. For example, if your business is seasonal and you know you will have less income coming in at a particular time, you can use the forecast to plan expenditure to help you through the quieter times.

A cash flow forecast is also a helpful tool to spot trends to see if your business is on the right track.

In 13 weeks’ time are you predicting that you’re going to have more or less cash in your bank account than now?

If there’s more, great, what are you going to spend it on? Are you going to reinvest it into the business, pay down debt or give yourself a bonus?

If it’s less, why? Do you need to collect money in quicker, do you need to increase sales, are you holding too much stock or do you need to cut expenses?

Knowing this information, you can then make important business decisions based on facts rather than gut feel.

One objection I often hear from people when I suggest they should be preparing a cash flow forecast is that they’re too busy to keep it up to date. If you’re thinking this, ask yourself what you’re doing instead that’s more important.

Remember, you should be working on your business, not just in it and making sure your business has sufficient cash flow is one of the most important things you can be doing.

If you have any questions about cash flow forecasting, feel free to email me at editors@businessadvice.co.uk and I’ll happily answer them for you.

Catch up on the rest of David’s cash flow series:

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ABOUT THE EXPERT

David Walker is the founder of Grid Law, a firm which first targeted the motorsport industry – advising on sponsorship deals, new contracts and building of personal brands. He has now expanded his remit to include entrepreneurs, aiding with contract law, dispute resolution and protecting and defending intellectual property rights.

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