Cash flow management: Forecasting 


Cash flow is both a key component of financial management and the lifeblood of any business. Keeping control of yours can help you to maintain a stable financial position as well as aid your future success and growth. By managing your cash flow well, you should be able to estimate the amount of cash that you’ll need to have available at any given time, anticipate trends in sales and expenditures and evaluate when there may be a shortfall or cash surplus.

To help you keep your cash flow healthy, create a plan from the outset to help you pre-empt these situations.

Creating a Cash Flow Forecast

This means predicting the movement of cash in and out of your business over a specified time period, anticipating fluctuations in your payables and receivables and planning and allocating funds accordingly1.

At its simplest form a forecast could be a detailed excel spreadsheet. Your plan can cover any length of time you choose, from a week to 5 years - just make sure the chosen period works for you. There’s also software available if you’d prefer to manage it without having to use excel.

Why Create a Forecast?

Forecasting your income and expenditures in advance will help you:

  • Ensure you’ve budgeted for seasonal and other changes that could impact your sales
  • Make sure you’re in a position to afford all your planned business activity
  • Allocate your money effectively and spot opportunities to cut down spending
  • Identify gaps and cash shortfalls before they become a problem
  • Assess if you need to borrow money
  • Evaluate your customer payment terms


Forecasting vs Budgeting

While forecasting your inflows and outflows will involve some level of budgeting, a good forecast should track exactly when expenditures are due to occur (predicted or actual) and when income is due to come in (and in what volume). A forecast is based largely on developing or historic trends, estimations and adjustments in line with sales.

How Far in Advance Should I Forecast?

You can forecast as far in advance as you want and break it out by any period of time. You might find it useful to forecast a complete financial year in advance, detailing each month separately, or, especially when starting out, you may find it easier to manage your cash flow week by week.

Where Do I Start?

For the Start-Up:

As a start-up business, without knowledge of your standard payment cycle and slower business periods, cash flow management can appear a daunting task. But we all have to start somewhere, and this should be with any information you do have on what the costs of running your business will be – a lot of which you’ll have put in your business plan.

Firstly, you need to know how much money you have to begin with – whether you’ve already allocated it to your start-up budget or not, note it down.

For the Established Business:

Similarly, how much cash do you have on hand, at the beginning of the period for which you are projecting?

What Else Goes into a Cash Flow Forecast?

For simplicity’s sake, you might want to split your forecast out by income and expenditure, listing the associated costs of each.

Income Sources

Some of these may be covered in working out how much funding you have available at the start of the forecast period, but if you’re expecting additional income from other sources, put them into the forecast.

It’s unlikely that your income from customer sales will come in at the exact same amount each month, so your forecast should always allow for this. Think about periods when you expect sales to be high (this could be in the weeks leading up to Christmas if you’re in the retail sector) and when they might be low (if you’re a contract builder, you might have less work during the winter).

Similarly, If you intend to launch marketing or advertising campaigns in certain months, don’t forget to estimate what uplift you expect in sales and incorporate this into your forecast.

Other sources of income might include grants, donations, loans, or your own personal investments. And if new sources eventuate, always factor them into your plan.

Outgoings and Expenditures

Fixed Costs

Once you’ve input this information, think of any fixed costs (Often referred to as overheads) that you know will be going out during the period and won’t be changing in the short term – for example if you need to pay rent on your business premises on the same date each month, make sure you include this in each step of the forecast.

Fixed costs will often make up the bulk of your business expenses, and may include:

  • Utility bills if fixed (Electricity, gas, water, phone bills)
  • Loan repayments, including interest charges
  • Staff salaries / Direct labour
  • Insurance
  • Taxes and Contributions (National Insurance, Employee Contributions)

Variable Costs

Your variable costs will rise and fall in line with your sales and production levels, and will make up a key component of your forecast – despite being the most difficult to pre-empt.

Variable costs are generally anything relating to the product or distribution of your goods or services. Common variable costs that may be applicable to your business include:

  • Production Costs (of your product)
  • Billable Staff Wages
  • Commissions
  • Credit Card Fees
  • Freight / Shipping and Packaging
  • Travel

When trying to work out your variable costs, try to think of anything that will be impacted as a result of a change in sales. For example, if you’re planning to boost your sales with an advertising campaign, make sure you’ve allocated enough money not just for the campaign, but to produce extra goods and pay extra staff – without assuming that sales profits will cover everything.

Note: If you’re a start up, you may have some additional upfront costs (fixed and variable) to get your business off the ground that should be included. For example, a deposit on business premises.

Allocating Extra Funds:

Once you have the basis of your forecast, it’s wise to ensure you have additional funding available should something unexpected arise.

Reading the Forecast

Once you’ve input all income sources and expenditures into your forecast, don’t just leave it alone until the next financial year.

It’s important to regularly monitor how your financials are fairing against what was forecast, look out for any potential cash flow gaps and make adjustments – for example if one month didn’t go as planned, or a new known future expense has cropped up that you’ll need to budget for in advance. In addition, there are five key metrics that you may want to keep an eye on month to month.

  • Total Inflow

This is the total coming into the business from your income sources above, and entering the cash flow cycle

  • Total outflow

The sum of all expenditures and outgoing each month (or chosen timeframe)

  • Net Cash flow

Your net cash flow is the difference between your inflows and outflows in any given period and represents how much money you have in your cash flow cycle. Net cash flow is a useful metric in determining the short term financial stability of your business

Note: Your net cash flow is not the same as profit  

  • Opening Balance

The total spendable cash available at the beginning of the period (typically a month)

  • Closing Balance

The sum of cash and bank balances at the end of the month, which then become the opening balance the following month

  • Actual Figures

To measure how accurately and efficiently your business is performing against your forecast, input your actual figures against your original numbers. The sooner you do this the better, as it will help to spot areas of overspending, gaps developing in the cycle and instances where you may need to adjust your plan

Five Tips to Better Forecasting 

With a forecast in place, remember the following tips to help your ongoing cash flow management:

  1. Make sure your forecast is still realistic after your first few weeks operating and check that you haven’t under or overestimated your costs
  2. Look for opportunities to reduce your fixed costs, like utility bills, to increase the amount of available cash
  3. Build good relations with your clients and suppliers, in case you need some leniency later
  4. Make your payment terms work for you. If the lag between making the sale and receiving a customer’s payment is making it difficult to stay ahead of your expenses, think about shortening them
  5. Make it as easy as possible for customers to pay you. Invoicing as soon as possible and accepting online payments could all ensure faster payments and a smoother flow


Cash forecasting can be an arduous task, but it’s likely that you’ll find it one of the most valuable in managing your business.



1: Cash flow Forecast


This content was created on 28th June 2018

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