Every business should have a cash flow forecast so that it can project the amount of money coming into the business (inflow) and the amount of money leaving the business (outflow). Your cash flow will help you to identify peaks and troughs in your finances. Used effectively it is a valuable tool for your business. A cash flow forecast usually covers a 12 month period for smaller businesses, larger businesses may need to produce one for three or even five years.
The cash flow forecast should relate to the actual money that is due to be collected in and paid out in each period, not to the month when an invoice is raised or bill received (a sales forecast will contain this information and can be used to create the cash flow forecast).
Cash flow forecasts are often produced on a month by month basis, but you may find that a shorter period is of benefit when tighter financial control is needed, in fact some businesses operate these controls on a day by day basis during difficult periods.
A projected cash flow predicts the amount of money that you have accurately estimated will come into the business each month and the amount that will be paid out each month. It is important to remember that a cash flow forecast makes up part of the overall business plan and needs to reflect the same information contained within other parts of the plan.
For example:
If you are looking to rent premises for your business and the cost of this is £300 per month then you should show this money within the cashflow forecast under the month in which it will be paid. Therefore if it is £300 per month (to be paid on a monthly basis) then the amount will appear on the cash flow forecast under expenditure each month.
However if the rent is paid quarterly in advance with payments being made in January, April, July and October, then in this scenario the cash flow would show the rent as £900 in January, April, July and October.
It is important to predict as accurately as you can when producing your cash flow forecast, but some headings will prove harder than others to estimate and of course you will not get it all right.
It is crucial for all businesses to have enough cash in hand to make sure they can pay their bills on time. A cash flow forecast will help you to project your financial needs, but remember it will need to be updated with actual figures each month to get the full benefit. Cashflow forecasts can:
Elements of a cash flow include:
Our cash flow forecast will be available here soon; in the mean time please contact your local branch for a template.
Some cashflow questions and answers
Question: What is the difference between a cash flow forecast and a sales forecast?
Answer:
The cash flow forecast is different from the sales forecast in two key areas:
1. The projected sales income figure in the sales forecast is shown in the month that you feel the sale will be achieved, whereas the cash flow shows the month when you will be paid. For example:
If you give your customers 30 days credit it will have the following impact:
Sales made in let’s say March will show on the sales forecast in March, but if 30 days credit has been agreed then the income figure will not show on the cash flow until April, if 60 days credit have been agreed then the income will not show on the cash flow until May. Of course just because you have given your customers 30 days to pay, does not necessarily mean they will pay on time, you will need to have credit control systems in place to manage this.
When offering credit terms you need to consider the bills that will be due for payment to your suppliers by yourself and how you will manage this.
For example:
If you are making cakes to sell to farm shops and have agreed 30 day credit terms you will have to pay for the ingredients used in making the cakes before you get paid by your customers and this could have an impact on the cash flow for your business, unless of course you have negotiated credit terms with your suppliers.
2. The cash flow also shows details of all other monies coming into the business such as bank loans and all monies going out of the business. This should lead to a bottom line figure of the amount of cash left within the business or show the amount the business is overdrawn.
Question: Why do I need a cash flow forecast
Answer:
By having up to date information you will be able to make informed decisions about the business rather than relying on a best estimate.
The cash flow will provide you with some important information regarding the amount of money it projects that you will have in your bank; this allows you to plan ahead for the months where you will have more money going out than is coming in. Cash flow problems have caused many businesses to cease trading so it is important that you are aware of the financial status of the business at all times.
If your business is going to have a turnover of more than the VAT threshold, (please check http://www.hmrc.gov.uk/vat/index.htm for current VAT threshold levels, rules and regulations), you will need to register for VAT and include VAT in your cash flow projections. Please remember that when you charge VAT you are collecting it for HM Revenue & Customs (HMRC) and the appropriate amount of money will need to be put aside ready to pay over to them following the completion of your VAT return.
Question: Should I record how I arrived at my forecasted figures?
Answer:
It is useful to produce details of the rationale that you have used when pulling together the information for your cash flow forecast as a reminder for you in the future..
For example:
If within your sales projections you assumed that you will be undertaking paid work for 80% of the time during your high months, give your reasoning for this.
Where the business sells its services by the hour, give details of how the hourly rate has been arrived at and why you feel you can achieve these figures.
Give brief information for each heading included within the cash flow on a separate sheet.
It is important to revisit your cash flow forecast each month and compare your projected figures with the actual figures; this will give you management information to enable you to make informed decisions about your business.
Some businesses find it particularly useful to provide an additional column in the cash flow forecast to reflect the actual income and costs as each month has been completed, this will provide a visual indication to compare and an opportunity to assess ‘variances’ between budget (forecasts) and actuals, thus providing an opportunity to make decisions and exercise effective control of the business.
Question: Why do I need to review my cash flow forecast on a regular basis.
Answer:
It is essential when running the business that you update the cashflow regularly and complete it with the actual figures achieved. This should provide you with information as to the actual amount of cash retained in the business as opposed to projected cash amounts, and will also allow you to measure your progress in the business, comparing how you thought the business would do with how it is doing in reality.
This comparison helps you to see if your income projection is actually being achieved and whether your expenses are at a level that you anticipated they would be.
Question: What is a sensitivity analysis and why is it useful?
Answer:
Producing a sensitivity analysis to go with your cash flow can help you to consider ‘what ifs’ and the impact they could have on your forecast.
If your sales were to drop by 20% but your running expenses were to stay the same you would need to know what impact this could have on the business. We think you will be surprised at the impact a 20% reduction in income will have on your bottom line!
A template will be available soon, in the meantime please contact your local Business Advice Centre for support.
Question: Who needs to see the cash flow in addition to the owners of the business and key staff?
Answer:
The cash flow is an essential tool for you to use but you may also find that your Bank Manager needs to see it before they can provide you with a bank account.
Finance providers will need to see your financial forecasts before they will agree to invest in you business.
When looking to take on premises the landlord will also quite often want to see your cash flow forecast.
This list is not exhaustive but demonstrates of the type of people who may wish to see this information.
That’s the focus of Morpeth based Engleby Associates Ltd. With the recession affecting many local businesses, Engleby Associates run by Richard Lane aims to help businesses of all sizes become more profitable and improve their performance through sales effectiveness development and training programmes.
Richard has many years experience in the training and learning Industry, and was most recently, a Senior Executive in...
