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Cash Flow Forecasts Explained

Read about how cash flow forecasting can help you future-proof your business' finances by revealing potential pressure points in your cash flow.
Cash Flow Forecasts Explained

Updated on 24/09/2020

Cash flow forecasting is all about gaining an insight into how your finances are likely to fluctuate and develop in the coming weeks, months or even years. It’s a core practice that is essential to a business’ success, and it has drawn even more of a spotlight during coronavirus; where the short-term survivability of many small businesses may have been challenged.

So, this article will explain the various elements of cash flow forecasting, including:

What is a cash flow forecast?


Put simply, a cash flow forecast is a document which takes into account all of the important incomes and expenditures your business has faced and is going to face in future. It includes things like your business’ cash flow, sales data, sales projections and costs, and its purpose is to equip your business with the tools it needs to understand exactly where it’s heading.

Through intelligent forecasting, you can stay on top of the timing cycle between paying your suppliers, holding your goods and then getting paid by your customers, which is typically a cycle that the success of many small businesses depends on.

Why is cash flow forecasting important?


By putting in the effort to create a forecast for your daily, weekly or monthly cash flow projections, you can quickly identify where potential pressure points could be for your business. You may notice that cash is likely to be stretched one month, and having this foresight could enable you to take action sooner to ensure that you’re always able to meet your business’ financial needs.

In essence, cash flow forecasting is about planning for the future. Small businesses today have a diverse range of needs and objectives; often undertaking marketing activity while improving their operational efficiency, and bolstering customer communications while also developing or growing their staff. Almost every development activity undertaken by a business has some sort of cost associated with it, and looking at your cash flow forecasting could support you with appropriately and fairly allocating resources to where they’re most needed.

In a more short-term sense, cash flow planning could go a long way to making sure the growth of your business is sustainable. So, we’ve established that cash flow forecasting can be useful- but what tools do you need to start building a good forecast?

Tools and technologies to support with cash flow management


There are two highly popular options for creating a cash flow forecast;

  1. Using database software such as Microsoft Excel
  2. Using 3rd party forecasting software – such as cash flow apps

The advantages of using Excel (or a similar software as there are plenty of alternatives out there) is that it’s generally quite cheap and there’s probably a lot of guide content and resources online that could help you to figure out how to use it properly. Also, with these products being so widely used and acknowledged, someone new coming into your business may be able to familiarise themselves with your forecasting process fairly quickly.

While Excel and other similar software are likely to be the most widely used forecasting tools for SMEs, they aren’t the only option. Cash flow apps, for example, have a very different set of advantages. These external technologies are often well equipped to analyse your data at scale; giving you access to key insights into your business’ finances that you may not naturally get through manually building your cash flow forecast unless you know exactly what you’re looking for.

How to create a cash flow forecast


So, it’s time to create a plan that tracks your cash flow and makes projections for the future. Where’s the best place to start?

What sections should you include in your cash flow plan?


Put simply, there are three key elements to include in your plan. Those are:

  • Your business’ revenues – including any cash coming into the business.
  • Your expenses – meaning all of your outgoings.
  • Net cash flow – this involves subtracting your total expenses from your total revenues to get an idea of the cash coming in and the cash going out and what that leaves you with.

The more detailed the information you inject into a forecast is, the better. For example, if you’re trying to dig down into your monthly profit and loss, you may benefit from recording which specific products are generating large profits so that you can shift the focus of your sales and marketing activity to prioritise these products.

Taking a granular view of your sales mix in this way could equip you with the insights needed to make changes that improve your business’ financial performance.

Which items should you include in a cash flow plan?


Here is a handy list of elements that may be worth considering when building your own forecast:

Cash in

  • Cash income from customer sales
  • Collection of money you’re owed (e.g. if you give an important client longer to pay you than at point of sale)
  • Sale of assets
  • Tax refunds

Cash out

  • Overheads including rent and bills
  • Cost of goods
  • Staffing costs
  • Marketing costs
  • Loan payments
  • Shareholder dividends
  • Purchase of assets
  • Other costs (e.g. cost of vehicles, legal and accounting, insurance etc.)

It’s important to also consider the timeframes within which these elements are likely to be relevant. If you’re working on a monthly cash flow but have to meet certain quarterly or annual payments, you may need to remind yourself to factor those longer-term payments into the equation to get a realistic understanding of where you’re at.

What insights can forecasting unlock for your business?


Cash flow forecasting can help you answer some important questions about your business, and these answers can inform your wider business decisions.

For example, am I in a position to be able to take on a new member of staff? Are my profits substantial enough for me to start thinking about using internal finance to drive my business’ expansion? Or, even more importantly, am I going to run out of cash next month?

If these questions are the kind of questions that you can’t afford to not know the answer to, it may be worth contacting your accountant to kick-start a conversation around your cash flow forecasting needs. If your accountant serves as less of an advisor for your business, (instead focusing on handling difficult receipts and bills), you may wish to seek expert advice to help you get a deeper understanding of your cash flow patterns. Not investing in understanding your finances in the short-term could potentially cause trouble later down the line.

How has coronavirus affected cash flow forecasting?


When the coronavirus crisis first hit, many small businesses may have stopped using forecasting tools, realising (unfortunately) that not much cash was coming into or going out of the business. Now that these businesses are trading under different conditions, though, it could be time to revisit forecasting.

If you can gain insights into your business’ financial future right now, it may help you make important decisions to help protect your cash flow from foreseeable challenges, and develop contingency plans for how you’ll react if market conditions change suddenly against your favour.

For example, you may notice through forecasting that you’re likely to hit a dip in revenue in a few months’ time- based on seasonal projections. Consequently, you could then explore your financial options to ensure your cash flow can withstand that tough period, whether that involves saving up extra cash reserves in the meantime, or exploring external sources of finance such as a business loan.

Ultimately, cash flow forecasting is a great process to engage with if you’re a business owner who wants to take control of your finances and set realistic expectations for your financial future.

How could Esme help?

These are difficult times for many businesses, so it’s important now more than ever, to take good care of yourself and your team. If you’re concerned about your business being impacted financially due to coronavirus, visit our FAQ's page for information about how we may be able to support you.