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.
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.
If you’d like to plan out you own cash flow forecast, here are some suggested steps to get started.
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.
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.
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.
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.
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.
(Special thanks to Scott Morris from TAB East Auckland, New Zealand for this tips)
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.