Cash flow forecasting: the foundation of a business

Cash flow forecasting

August 09, 2016

Posted in:
Small Businesses

As the saying goes, cash is king. And this is true no matter what the size of your business.  It is essential your cash flow works efficiently from the start.

Maria Goodall, Marketing Communications Manager at Start Up Loans explains how to create a cash flow forecast.

As a business owner you need to know exactly what money is coming in and what money is going out and when.

If you have a financial plan which is robust, you will be able deal with any issues or challenges that might occur. Striking a good balance between being paid by your customers and paying your suppliers should mean you don’t run into any problems.

Cash flow forecasting may seem daunting if you haven’t done it before, but you don’t have to be a spreadsheet genius to work out the costs of running your business.

It’s a simple case of adding and taking away, what you are spending and what monies should be coming in. You can download a free cash flow forecast template on the Start Up Loans website.

What to include in your cash flow template:

  1. Revenue (cash coming in)

In this section you should list any money that you have coming in to the business such as investment, loans and money from predicted sales and contracts.

  1. Expenditure (cash going out)

This section of your cash flow forecast should include all money spent (expenses) relating to business activities. For example:

  • Salaries
  • Loan Repayments– if you have listed a loan in the ‘Revenue’ section of the cash flow forecast, make sure you include the monthly repayments here
  • Expenses– what items have you purchased for the business? Include things such as equipment, premises, and any marketing costs

Tips for cash flow forecasting –

  • Be realistic
  • Remember the definitions of: income (money received from work and/or investments) and cost (amount of money needed to produce your product/service)
  • Plan multiple scenarios, including for when things go wrong
  • Factor in fixed costs (constant costs such as rent and salaries) and variable costs (costs dependent on how much you produce such as direct materials)
  • Plan for seasonality and remember to factor in expected busy and quiet times of the year

Look to see if there are ways you can work more efficiently. This is important not only for managing cash flow, but is also essential if you decide to grow your business.

Start off with the basic operational costs:

Look at how much it costs to produce your goods or services.

Are there any unnecessary costs you could cut or reduce without impacting the quality of what you offer? You may be able to negotiate a better rate with your suppliers.

Take some time to look at how quickly money is coming into the business.

If you are waiting more than 60 days for payments from clients, you could consider incentivising existing customers to pay more quickly by offering a discount. Always make sure you email your invoices rather than post them. This way they are less likely to get lost.

A true understanding of your businesses cash flow is the foundation for any successful business.

Put a plan in place and be disciplined. Having enough cash in the bank to pay your costs comfortably is every bit as important as winning new customers. With proper planning, your business is a lot more likely to succeed.

Start Up Loans provides government-backed funding and business support to individuals looking to start or grow their own business.

Offering pre-loan support to make sure potential business owners, Start Up Loans understands the importance of balancing the books for forward planning, so every applicant must provide a cash flow forecast.