A cash flow forecast is an estimate of the amount of money you expect to flow in and out of your business, and it includes all your projected income and expenses – usually covering the upcoming 12 months.
Understanding cash flow is the key to running a successful small business. Smart cash flow management will help ensure your business runs smoothly. It gives you the insight to keep on top of your business’s financial health.
A cash flow forecast can help you make better decisions. For example, it can allow you to:
"Understanding cash flow is the key to running a successful small business."
Cash flow forecasts can also help you judge the effect of an upcoming business change or decision. If you’re considering hiring a new employee, for example, you can add the additional salary and related costs into your forecast. The new figures in your cash flow forecast can tell you whether hiring that additional employee is likely to strengthen your business.
Including best, worst, and most-likely case scenarios allows you to see how your business will fare if you suddenly hit tough times or better than expected trading conditions.
You can use your cash flow forecast to check if the business is meeting your expectations by:
If your sales are higher or lower than forecast, for example, you’ll want to find out why. Ask yourself:
Using forecasts in this way allows you to actively manage your business. It empowers you to ask the right questions, and ultimately make better decisions.
Follow these steps below to begin drawing up a cash flow forecast for your business. Use our cash flow forecast template to guide you through.
Start by estimating your likely sales for each week or month of the next year:
If you’re starting a business, base your sales estimates on:
If you’re planning a new marketing drive or launching an exciting new product, you’ll need to put these increased sales expectations into your sales forecasts.
Similarly, if a new competitor has just entered the market, you might want to drop your forecast figures a little to allow for the impact they could make on your market share.
Forecast the timing of cash
If you operate a cash-only business, forecasting is easy because payments occur at the time of sale. If you sell on credit, you’ll need to factor in likely delays in payments. If your terms are 30 days, you can then expect to receive payments between one to two months after the sale has been made.
Estimating payment timing is a skill that improves with practice. Some payments may arrive sooner, some later, depending on how effectively you manage credit sales and debt collection.
Now that you know how much income you can expect (and when to expect it) you can put these figures into the correct columns in your cash flow forecast.
Costs are made up of fixed and variable costs. Fixed costs (overheads) are those you’ll have to pay regardless of your level of sales, such as rent, salaries, and utilities.
Variable costs change with your sales levels. For example, if you sell more products, you’ll need to order more raw materials or inventory. Make sure you:
Once you’ve identified all your expenses and when you need to pay them, add them to your cash flow forecast.
Your forecast is ready for use once you have entered your weekly or monthly income and expenses. Simply add in an opening bank account balance, and the cash flow forecast template will automatically calculate the bottom line cash position for each weekly or monthly period.
You can see if you have enough money to pay bills each month, or if your business needs more working capital. If you spot a cash flow crunch in a future month, you have time to approach lenders and investors about financing options. You can also plan what to do with any cash surpluses.
Update your estimates against actual business performance (on a weekly or monthly basis) so that your cash flow forecast is as accurate as possible. Accurate information is essential to your decision-making.
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