What a cashflow forecast is used for, including templates

A cashflow forecast will enable your company to predict its future financial health. By capturing expected expenditure alongside predicted sales, this tool can provide a guide to your company’s cash fluidity over the coming weeks or months.

It will help you establish whether or not you can commit to spending on assets, or new staff. It will also help you identify potential problems, particularly as running out of cash (insolvency) in the near future – the single biggest cause of small business failure.

Potential limitations

Forecasts of this type shouldn’t be set in stone. Both internal and external factors can affect your business and, therefore, your expected liquidity. Update your forecast regularly to improve the accuracy of results.

Similarly, a cashflow forecast can be used to give you an insight into your business’s financial future, but it can’t predict the future. People often ask how far in advance their forecast should go, but there is no definitive answer to this. Generally, the accuracy of a cashflow forecast will diminish the further you try to predict into the future.

What’s included in a cashflow forecast?

Here are the steps you should take to create a cashflow forecast. We’ve also included some useful links to downloadable templates at the end of the article.

To create a comprehensive cashflow forecast, you should create a sales forecast first.

In the sales forecast,  state your expected future sales and break the figures down into days, weeks or months. Often, businesses prefer to estimate figures on a monthly basis, but weekly figures may be more appropriate, depending on the nature of your business.

Next, a profit and loss forecast can be used to identify any additional profits which may be made, as well as any losses which may be incurred. If the business is planning to sell an asset, for example, this could be considered to be an additional profit when compared to regular sales.

Conversely, the day-to-day running costs of the business can be counted as losses and should be listed as expected expenditure. Often, these can be fairly easy to predict accurately, as many expenditures invoke the same cost each month.

If you have a specific number of salaried staff, for example, the cost of paying your employees is likely to be around the same amount each month. If you purchase raw materials with a stable price on a fortnightly basis, you should be able to predict the relevant cost with a high level of accuracy.

When a sales forecast and profit and loss forecast are presented together, a cash flow forecast can be created.

If you expect to generate 1,000 sales in March, for example, this data can be carried over to the forecast. The cashflow forecast should detail when you expect the payments to be received.

Although you may expect the sales to occur in March, if your clients have a standard 30-day invoice term, the actual payment may not be received by the business until April. Therefore, your cashflow forecast can take potential late payments into account in order to increase the accuracy of your figures.

Similarly, your cashflow forecast will contain figures sourced from your profit and loss account. When you’re compiling your cashflow, however, you should record outgoings when you plan to pay them, not when they were incurred.

When the business’s outgoings are deducted from the incoming funds, you’ll be left with either a net cash inflow or a net cash outflow.

Total Income – Total Expenses = Net Cash Flow

When an outflow occurs, it signifies that the business has spent more than it’s earned but a net cash inflow indicates that income has exceeded outgoings for this period.

Example

	Jan	Feb	Mar
Opening Bank Balance	£5,000	£4,000	-£250
Money In	£1,000	£250	£3,500
Money Out	£2,000	£4,500	£2,500
Net Cash Flow	-£1000	-£4,250	£1,000
Closing Bank Balance	£4,000	-£250	£750

Should every business have a cashflow forecast?

Not all businesses need to make forecasts – you may be a consultant, for example, with very few monthly transactions, so this tool is unlikely to add any value to your business.

However, many small companies deal with high levels of transactions – both incoming and outgoing. A cashflow forecast is an important method of ensuring that your bank account has enough cash to cover all eventualities – or to identify if you need to secure short-term sources of finance.

You will be able to avert a potential crisis. If stock is damaged, for example, you will need to make sure you have enough funds to continue trading until your insurers pay out for the damaged stock.

It will also help you avoid the problem of ‘overtrading’, which can force an otherwise successful businesses into financial trouble. For example, if you accept a £5,000 order, but you need to spend £3,000 on parts / costs in order to fulfil the order, you need to be sure you have enough cash in reserve, as you may not receive the customer’s payment before the agreed delivery date.

Useful Resources / Downloadable Templates

• FreeAgent’s excellent guide to creating a cash flow forecast.
• Good guide and downloadable template (Excel) from Start Up Loans site.
• Another downloadable template (Excel) from ACCA.