Developing a Cash flow Forecast

Keeping track of your cash flow at the best of times is important. But with the economy hitting a bit of a rough patch, cash flow could be severely affected and could cause significant damage to your business.

As some businesses struggle to recover from the covid-19 lockdown, having a good eye on your cash flow and managing it well could mean the difference between the business running or closing.

Why do I need a Cash flow Forecast?

If you've ever done a business plan (and if you haven't, you should look at sorting one), you'll know all about cash flow forecasting.

A good cash flow forecast helps highlight potential problems and help you adapt to resolve them ahead of time, as well as giving you a chance to look at how your business could go over the next few months, or even years.

How do I develop a cash flow forecast?

A cash flow forecast is made up of a few key parts, similar to your profit and loss report:

  • Sales
  • Cost of sales (variable costs)
  • Overheads (fixed costs)
  • Bank balance

Sales

The first part, the sales, should be how you foresee your sales looking over the course of your forecast. Do you anticipate them going up? Is your business seasonal meaning they could actually go down?

If you're not sure where to start, look at existing data - what were the sales like last year? Were there any trends?

Also think about things such as:

  • Do you anticipate adding new products or services to your offering?
  • Are you hoping to win any new contracts?
  • What is the market looking like? For example, at the moment, will there be a knock-on effect from the coronavirus?
  • Are you hoping to expand your marketing, e.g. overseas?

Cash flow forecast

Cost of Sales

The cost of sales, sometimes referred to as "variable costs", are costs that will change depending on your output, such as materials.

It shouldn't include staff costs, electric or anything similar - these come into the overheads category (see below). If you manufacture a product and you're predicting an increase in output (for example, in the run-up to Christmas), it's likely that your cost of sales will go up too.

Overheads

Your overheads, sometimes called "fixed costs", are costs that you have to pay regardless of whether you have any output or not.

This would include things like rent, staff wages, electricity, gas, water, insurance, and so on.

When you're looking at this section, think about your agreements with your suppliers. Do they include a clause to introduce an annual increase in prices? Are you likely to change suppliers at the end of your contract? In reality, are they likely to increase with output?

Bank Balance

Remember that this is a cash flow forecast, so you're specifically looking at the flow of cash in your business.

You should also include your bank balance, starting with your opening balance and adjusting as the time passes. This should then give you a good idea of how your finances are affected as time progresses.

What period should I cover?

There is no hard and fast rule about what period you should be covering with a forecast, but 1 year is common.

However, if you are applying for finance, some lenders will want to see more detailed forecasts, such as 5 years, and even a best, and worst, case scenario.

Where do I start?

We've compiled a basic template in Microsoft Excel for you to get started. Just input your bank account opening balance, and fill in the gaps.

Download Cashflow Forecast Template (xlsx)

You should adapt the headings and categories to suit your business. We've included some common ones as examples.

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