Cash flow forecasting: the ultimate guide

What is a cashflow forecast?

A cashflow forecast shows the cash movements both in and out of your business, giving a good indication of how healthy your business is now and might be in the future.

It is not a one-off exercise, but should be updated and maintained, including actual cashflows, so it gives you a continuous and true view of your cash position. 

The advantage of cash flow forecasting

There are many ways to improve your cash flow, and forecasting is a intregral part of that.

Producing a cash flow forecast give you an insight into what the future might hold for you and your business financially.

This will allow you to plan strategically more accurately and with more confidence, identify, and therefore plan for, any potential times of shortfall, and ensure that payments can be made on time to suppliers and employees.

In fact, we’re pretty sure there aren’t any disadvantages to cash flow forecasting, so there’s no time like the present to get started for 2023.

Steps to cash flow forecasting

If you’d like to plan out you own cash flow forecast, here are some suggested steps to get started.

#1 How long are you forecasting for?

The first step to a cash flow forecast is to decide the length of time you want the forecast to cover.

A year may seem a long time, but in business, much can change in that time, so a 12 month forecast is a good starting point.

#2 List all your income

Income may be cash receipts from Sales (a good Sales Forecast will allow you to calculate this), investment interest, or additional funding eg loans.

For Sales income, you must take into account any credit terms, and therefore delay to cash actually landing in your bank account.

#3 List all your expenses

A review of past bank statements will allow you to work out what your expenses are likely to be going forward. These could include payments to suppliers, employee wages, rent and utility costs or loan repayments.

Again, take into account the payment terms that you have agreed with your suppliers to calculate when the cash will be taken from your bank account.

#4 VAT

If you are VAT registered, you must record payments to suppliers and from customers inclusive of VAT in your cashflow forecast.

You must then also include your estimated payment / refund of VAT to HMRC in the relevant VAT quarter.

#5 Continual Review

As with any forecast, make sure to update your cashflow forecast with actual movements as they happen, and use those actuals to enable you to predict future movements more accurately.

5 more ways to make forecasting easier:

• Do it monthly.
• Use automation technologies.
• Group accounts into categories.
• Use rolling three months and rolling 12 months where possible.
• Measure actuals against forecasts each month to improve your forecasting skills.
• Work with a trusted advisor, like a TAB business coach, to guide you through the process.

(Special thanks to Scott Morris from TAB East Auckland, New Zealand for this tips)

Final things to remember for your forecast

• Don’t forget that not all flows are regular – remember to include your estimated annual Corporation Tax payment and your quarterly VAT payments.
• Forecast an appropriate time ahead e.g. a 12-month rolling forecast may work but you might have some longer-term project which means a multiple year forecast could be better for you.
• There are some great software options to automate your cashflow such as Xero or Quickbooks
• Factor in price inflation and other cost increases into your forecast. This is important during times of recession and inflation so you can have an accurate picture of how this will impact your cash and bottom-line profit.

   

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At TAB, we support business owners to get a hold on their cash flow, forecasting, losses and profits through impartial advice from our peer advisory boards. Listen to Sam Lee explain how TAB helped him improve his business' revenue model.