Small Business Advice

How to do a cash flow forecast

09 Jan 2018

If a business runs out of cash and is not able to obtain new finance, it will become insolvent. Therefore, it is a poor excuse for management to claim that they didn’t see a cash flow crisis coming.

In business, “cash is king”. Cash flow is the life-blood of all businesses – particularly start-ups and small enterprises. As a result, it is essential that management forecast what is going to happen to cash flow to make sure the business has enough to survive.

As a small business accountant in London, the Accounts & Legal have worked with many business from a range of industries to help them produce cash flow forecasts which, in turn, have propelled the performance and growth of these companies.

Get in touch with our team of accountants in London to discuss how we can help your business move forward, or try our Instant Accounting Quote tool and get a fee in just five clicks.


How to do a cash flow forecast

With the help of Excel, most business owners should be able to manage a working weekly cash flow forecast. To help you focus on what cash your business needs, it is good to keep a rolling cash flow forecast which predicts cash flow about three months into the future.

This will give you at least 3-months’ notice of any problems. For manufacturers this is crucial because of the length of time of the sales and build cycle - this time represents cash tied up on working capital.

A rolling cash flow forecast means you're going to be updating your cash position at least once a week. Keeping a close eye on your cash position means that you will have the opportunity to sort out any issues in good time. An unexpected crisis position with your cash flow is a sign of poor management.

Overheads should be relatively easy to predict over a three-month time frame. You will know the cost of rent, rates, insurance etc. For most businesses, staff wages are also pretty fixed over this kind of timescale too.

A quick tip for capturing all your regular fixed costs is to look back over your bank statements for the last three months. You will also know from your incoming invoices or purchase orders who you owe money to and when it needs to be paid.

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Sales Predictions

Whilst predicting overheads is relatively easy for an existing business, predicting sales can be less so, although it is easier over a shorter period.

If you're a manufacturer, you'll have a bunch of live quotations out with customers at any one time. You should be able to predict reasonably accurately from past experience what proportion of these will turn into firm orders. 

You should certainly know the length of your manufacturing cycle and what terms you're selling on. From these pieces of information, you can predict when you'll be receiving the cash.

For wholesalers or retailers, which sell on a more immediate basis, you need to look back at your historical data at sales in the relevant week last year and adjust by what you know about major customers, or whatever else is happening in your market now.

Maintaining your cash flow forecast

Every week you should set aside time in your diary to update the cash flow forecast. Add another week onto the end of it and modify any numbers that you know have changed in the past week - for example, if one of your customers has told you that payment will be delayed for another month. 

Alter the numbers and have a look at the difference this makes to your cash flow over the coming weeks.

Modelling

You can also use your rolling cash flow to answer “what if?" questions. 

For example, what would happen if you got an unexpected large order, or your key supplier suddenly wanted payment on delivery rather than allowing 30 days credit?

You can also model the impact if you changed your payment terms. For example, if you wanted to take less of a deposit on payment upfront.

By getting into the discipline of updating your cash flow each week, you will have a much better grasp on how your business works and which operational areas drain cash from the business. Targeting these areas will help liquidity and solvency of your business and allow you to sleep better at night.

Keir Wright-Whyte

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Managing Director

0207 043 4000

About the author

Originally graduating with a degree in geography from Edinburgh University, Keir claims that he was then tricked into becoming an accountant by one of the UK's top 5 accountancy practices.The deception extended to the usual training in audit and associated activities.

Keir subsequently worked in a number of advisory roles with clients including in the energy trading, pharmaceuticals and financial services sectors.

He loves working at Accounts & Legal because of the variety of work and clients, the excellent team ethos and morale, the importance placed on genuinely helping and being useful for clients and because he believes what he does matters to clients and helps the firm.

Keir's primary role is to ensure that new clients with complex businesses or needs are on-boarded in the best way and he is a "trouble shooter" both for clients and where complex issues arise internally. He also helps the accounting teams strive to improve what we do for clients, whether processes or services.

When not debiting or crediting, Keir has a penchant for fixing old buildings, skiing, surfing and cycling.

  

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