bookkeeper running a cashflow forecast

Small business guide: How to forecast cashflow for your business

Posted on 14th August 2023 by

bookkeeper running a cashflow forecast



Increased sales are often celebrated, but any sales improvement can mean an increase in fulfilment costs, which can affect your cashflow.

Tracking and forecasting cashflow is crucial for starting, operating, and expanding a business. It can inform you of potential future challenges and help you plan for controlled growth.

Good cashflow forecasting will no doubt have become useful to many businesses since the economic downturn started to bite in Autumn 2022.

If cashflow isn’t forecast well, or is simply not monitored closely, it can result in a business running out of operating cash, which is the second most common cause of business failure (1).


What is a cashflow forecast?

A cashflow forecast, also called a cashflow projection, is similar to a budget, but rather than it estimating revenues and expenses, it estimates incoming cash and outgoing cash based on past performance.

As mentioned earlier in this article, it’s common for a business to experience cashflow difficulties even when sales are high. This typically occurs when credit terms are offered to clients, such as when a client is allowed to pay for the goods after delivery.

In a business that operates this way it is imperative that cashflow planning and management is water tight.

For example, a creative marketing agency invoices for £50,000 worth of services and designs delivered to customers in March, along with invoices that are due in 30 days.

The business will have £50,000 of revenues for the month but won’t receive any cash until April.

On paper, the business looks healthy, but all its sales are tied-up in the accounts receivable.

Unless the business has plenty of cash on-hand at the beginning of the month, they will encounter problems covering their expenditures until they start receiving cash from clients.

If the clients experience cashflow problems of their own, then the agency could fall foul of late payments, which is a huge problem for many UK businesses.

With a cash flow forecast, you ignore sales on credit, accounts payable, and accrued expenses. Instead, you focus on the revenue you expect to collect and the expenses you expect to pay during a given period.

Many business owners and financial controllers will use the information provided in past cashflow statements to estimate your expenses for the period you’re forecasting for.


Growing your business gradually and with control

What are the benefits of cashflow forecasting?

Cashflow forecasting is essential for all businesses and prevention is better than a cure:

It helps you to identify potential problems – Being able to predict the months in which your business  might struggle for cash can give you the opportunity to make changes, such as changing your pricing or adjusting your business plan to expand your appetite, or even diversify to open up new revenue streams.

By forecasting cashflow, you’re able to plan ahead, which means a business could also reduce its operating costs, reduce stock and order volumes, negotiate extended payment terms with suppliers to cover the period of lower cashflow, or even look to access a short-term business loan.

It can help decrease the impact of cash shortages – If you can predict your cashflow and identify any potential periods of cash shortages, then you can take steps to mitigate the problems caused by a cash shortage. On top of the measure mentioned in the previous point, as a business you could put more money aside in advance to help cushion the blow or establish a line of credit with your bank to guarantee enough working capital to survive the period of cash shortage.

Working Capital = Current Assets – Current Liabilities

You can reduce internal pressures – Planning ahead and making contingency for a period of cash shortage, can help to make your employees lives better by ensuring there is cash available to pay suppliers, to place necessary orders, and so that your employees in your finance department are not having to provide explanations for late payments.

On top of these reasons, putting measures in place to ensure you have enough capital in reserve can confirm that you’ll be able to meet your payroll obligations.

It can help to keep suppliers happy – Finally, being able to predict cashflow allows a business to ensure it has enough money put aside for supplier invoices, or to negotiate temporary extended payment terms.


Hold your nerve when times are hard

When economies struggle, such as during a recession or when inflation rises sharply, regularly updating your cashflow forecast could give a business a slight edge over its competitors. It could also mean the difference between sinking or swimming.

Knowing your numbers is vital as a small business owner, so knowing your predicted cashflow can help you to adjust your payment terms to keep your cash flowing, such as requesting deposit payments prior to beginning work or prior to delivering a product to clients. Payment terms can also be reset to milestone stage payments to help keep cashflow strong.


Cashflow best practices

Best practices don’t simply include knowing how to forecast your cashflow, for a business to track successfully they must implement a proper system for managing the calculations and ensuring they are as accurate as possible.

There are certain best practices you can follow to help ensure your cashflow forecasting is accurate:

  1. Scope out your financial plans, both for the short-term and medium-term – It’s important to know exactly what your finances are going to be for the time period you’re forecasting for. This includes marketing campaigns, investment plans such as for new hardware and software, even acquisition plans.
  2. Conduct a situation analysis to understand your current cashflow – It’s key to understand what your current cashflow situation is. Draw out the categories for all your incomings and outgoings into a simple to understand format.

From this, a business owner or senior manager needs to be able to easily identify the ‘current debtors and creditors situation’. This should highlight the outstanding bills to be paid and the invoices that are outstanding, including the expected payment dates.

  1. Retain consistency regarding reporting and communication – Once you commit to cashflow forecasting you must maintain consistency in your reporting. Set a specific day each week and stick to it so that your information remains up-to-date and is delivered on a consistent reporting day. If the person responsible is on holiday or on sick leave, then someone else should cover the task in their absence.
  2. Forecast future cashflows for 3, 6, and 12 months, based on multiple scenarios – Once you have categorised your cashflows and set up your regular tracking of the categories cashflows, you can then use this data to anticipate future cashflows.

Recurring forecasting – For predictable and regular categories, such as rent, salaries, business insurance, you can set up a recurring forecast.

Fluctuating forecasting – For irregular categories, such as supplier payments, invoice payments from clients, you could model your forecast based on your future business plan. This should include anticipated payment delays.

  1. Simplify and automate with cashflow management software – Forecasting and reporting is only as good as the data that is available to you, and human error can throw your cashflow forecasting out of kilter. Adopting automation tools and accounting forecasting software can significantly reduce the risks of errors being made, whilst also speeding up the whole forecasting process.


What should be included in a cashflow forecast?

There are three key elements to a cashflow forecast, which are your:

  1. Likely sales.
  2. Projected payment timings.
  3. Estimated costs.
  4. Likely sales (cash inflows) – Look to your sales history to estimate your sales for the weeks or months that your cashflow forecast will cover. Remember to note any campaigns and promotions you have run in the past and factor in seasonality spikes and drop-offs.

While it’s good to look at past sales, it’s important to remember that markets shift on a regular basis.

When estimating sales, take any of your future plans into consideration. Look at the current state of the market you operate in and any emerging trends, as these will likely have an impact on your business and its sales.

You should consider any promotional activity or product launches you have planned, and don’t forget the activity of your competitors too.

Categories that could feature include revenue from sales; ad-hoc sales; new funding; sale of assets; interest accrued on savings.

  1. Projected payment timings – Once your estimated sales are in place, you can then add in the dates when you expect payments to be received. You should factor in contingency for late payment.
  2. Estimated costs (cash outflows) – At this point you should know what income you’re expecting, so you now need to list all of your expected outgoings for the same period.

Businesses tend to have fixed costs and variable costs, both will need to be included in your forecast, which can include fixed costs such as rent, salaries, utility bills, memberships and other fees, and of courses tax payments.

Variable costs can include purchase costs for stock or raw materials, delivery costs for your goods. You can calculate these from your recent invoices and your projected sales.


What methods of cashflow forecasting are here?

There are two methods that can be utilised for cashflow forecasting, Direct and Indirect. Understanding the difference between the two will help you determine which is right for your business.

Direct forecasting – The direct method is easier to calculate than indirect and is based on the obvious formula:  Cashflow = receivables – expenditure

This method is less commonly adopted because it can be difficult to gather the required data if a company uses accrual accounting rather than cash-based accounting. Accrual accounting is when transactions are recorded before money changes hands.

Indirect forecasting – The indirect method is more complex but is more widely used. It starts with net income (net income = revenue – costs of goods sold – expenses), then accounts for items that affect profit rather than effect cashflow.

With indirect forecasting, accounts receivable and accounts payable are adjusted for the actual flow of cash in and out of the business.

Money set aside to cover tax payments, but not yet spent, is added back in. Also accounted for are money from funding or paid back to funding sources, plus money regarding assets sold or purchased.


Access to funding

If you get to grips with cashflow forecasting and your projections indicate that your business plans will need extra funding, then your business could benefit from the additional finance to help it survive a lean period and help it continue its growth trajectory.

Funding can come in many forms, such as a business overdraft or loan to see you through a lean spell, or asset finance or equity finance to inject funds to assist growth.

Regular forecasting will tell you when you might need these extra funds so you can prepare your application in good time.


Top tips to keep cash flowing

The following tips could help you avoid rushed, and potentially costly, financial decisions:

  1. Get your staff involved to raise cashflow awareness – ask them to tell you if they find anything that could alter your cashflow, either for the better or for the worse.
  2. Regularly compare your cashflow forecasts with your real cash position – do they align? If so, you’re on the right track. If not, then you will need to revisit your forecasts.
  3. Build warning signals into your forecasts – For example, if you approach the last 10% of your overdraft limit, then you’ll know you need to draw on cash you’ve set aside in another account or know it’s time to seek external finance.


Accessing forecasting templates

Microsoft Excel has a range of basic templates for business management included within its files that can be customised and rebranded to suit your business.

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