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A cash flow forecast is one of the most useful financial tools a business has. However far too often it is low down on their list of priorities. Survey after survey shows that business owners do not have a plan in place to manage their cash flow.

Many believe these types of forecasts are only relevant for large businesses, however they are useful for ALL businesses, particularly in these difficult times. They do not have to be complicated – a cash flow forecast can be relatively simple to put together, depending on the size/type of business and the needs of the owners.

What is a cash flow forecast?

In simple terms ‘cash flow’ is a term for the money moving in and out of your business every month. Therefore, a cash flow forecast is a plan that shows how much money you expect to receive, and how much you expect to pay out, over a certain length of time in the future.

Why is a cash flow forecast so important?

Even if you believe you have enough cash available, this can quickly be used, especially in challenging times. Understanding the changes in your cash position can give you time to plan for future cash needs and take appropriate action. Using a cash flow forecast will help you with knowledge and understanding of future income, orders, costs, debts, etc. to look at how you and your business can move forward. It will allow you to make informed decisions with an understanding of the cash you have available now and in the future.

As well as being a useful tool for your business, it is also used by external parties such as your bank, funders, investors and sometimes creditors such as HM Revenue and Customs (HMRC) when you are agreeing a payment plan.

Six steps to managing your cash flow

To help you with your cash flow forecast we have set out a six-step plan to managing cash flow:

Step 1: Understanding your business

Understanding how your business is performing is critical to help you spot risks, problems, and opportunities more quickly. You will need to make important decisions to support your business and this needs to be based on an accurate view of where the business is and where it is going. Cash flow is going to be key.

Accounting records will need to be up to date so you can more accurately predict demands on your future cash flow, make more informed decisions and get a clear picture of what your business and, more importantly, you and your family may need to meet your aspirations.

Review your existing bookkeeping and reporting systems. Think about what information you need to see to help understand your business. Are they fit for purpose? Can they provide you with up to date, accurate information? If not, talk to your accountant about possible options.

Cloud bookkeeping is more accessible than ever, even for very small businesses. Many of these software packages come with reporting tools that allows you to assess your past cash flow movements, look at trends and project forward. Reporting does not have to be complex or time consuming. Anything is possible – from very simple quarterly figures to more detailed monthly reporting.

Once you have completed the review, you can assess available and trapped cash then use this to predict your future cash needs.

Step 2: Review your costs

Cost control is vital at a time when your business has cash flow pressures but is important at any stage of your business. It is important to determine what costs are fixed or contractual, what costs can be reduced or deferred and whether there is any discretionary spend. Will your plans mean that your costs will need to change to reflect these?

Schedule out your costs, analysing them between fixed, contractual, variable, and discretionary. Understanding the distinction between these will help you determine how they will fluctuate in the future. Review the costs line by line and note when the payment will be due, so you understand the timing of your payments and their impact on your cash flow.

Prioritise your payments, identifying what can realistically be saved or reduced. Make sure you prioritise key suppliers and relationships. Scale your costs, whether up or down, to what you expect your business to look like going forwards. Staff costs are usually the biggest cost for most businesses so ensure you understand what your staffing needs will be in the future. If you need to vary staffing levels or salaries, ensure you communicate with your employees and take advice to understand what you can do under employment terms/law.

As well as costs, do not forget other payments that may be needed, such as asset purchases, loan repayments, tax payments, finance payments, other creditors and – importantly – your drawings as a business owner. If you are VAT-registered also make sure you factor in the timing of your VAT payments.

Step 3: Look at future income

In most cases looking ahead and projecting figures based on previous income levels can be a useful start, but you may find that income levels may be more uncertain as you look ahead. Your business is in a fortunate position if you have certainty over the levels of income you will receive.

In the first instance, analyse income and determine what is known or predictable. Do you have any long-term contracts or regular customers where you know how much you will receive and when it will take place? Is there any seasonality to your income?

Once you have done this, you can start to predict your income for the coming period. Ensure you are aspirational to meet your plans but be realistic. Also consider your cost needs if there are any changes in income and revisit your cost plans, particularly for variable costs that fluctuate with sales or any asset purchases needed to meet your sales targets.

Consider when you expect your customers to pay. One of the biggest cash flow issues all businesses face is customers not paying on time. If needed, factor this into your plans. You may even feel it necessary to talk to your key customers and see if you can understand their plans. Consider offering payment plans/discounts to protect future cash flow and incentivise customers to pay earlier. Do not forget to factor in VAT if you are registered.

If your clients are using direct debits then this should assist your cash flow and allow you to predict future receipts. If you do not use direct debits, it is a useful tool as you can predict your cash inflow more accurately and you will be able to see easily those payments that have failed and why, which will allow you to act quickly with a client before a potential problem spirals out of control.

Step 4: Forecast your cash flow

Now you know your current position, have worked out costs and income you are ready to forecast your future cash flow!

Firstly, work out what you need forecasts to help with and who will be using the forecast. Will it help support short term decisions, detailed cash management or longer-term strategy? Is it for internal use or to support bank funding?

Next determine what period you are going to forecast. It may be that you need to look at the next few months or that your bank requires a forecast for the period of the facility. We would recommend that you have a plan in place for at least 12 months, but you may prefer to focus on three- or six-month periods.

Once you can answer these questions, you can choose a cash flow model that suits you. Your model does not need to be complicated – make sure they are fit for purpose. A basic cash flow template can be a simple spreadsheet, there are many templates available online, both simple and more complex. You may want to consider cloud-based solutions that link to your accounting software for more complex situations. Talk to your accountant if you are unsure what option is best for your needs.

Next factor in your work on costs and income. You should estimate your cash flow needs based on the worst-case scenarios. Be realistic – overestimate your expenses and underestimate your income. Reflect all known plans and work out where you expect to be at the end of the period.

Note down the basic assumptions that underpin the cash flow forecast with any supporting schedules backing up your workings. Cash flow forecasts are only as strong as the assumptions you use to build them. Where there is uncertainty, make the best guess you can but ensure you are realistic. If you document where you have made assumptions, you can revisit them later when more information is known. Including calculations in your workings rather than entering figures makes it easier to update when you need to change assumptions.

Ideally build in some flexibility or contingency for changes that you may not foresee. Use ‘what if scenarios’ to stress test your plans to see how adaptable and robust your plan is. You may consider building in an amount for contingency to ensure your cash is robust enough to deal with any changes.

Step 5: Access support and funding

Whether you are planning for growth, are a start-up or have cash flow shortages your forecast should now be able to help you identify your cash needs so that you can access the support and funding you need.

Talk to your existing bankers/funders in the first instance to see what facilities they have available to meet your needs. Think about alternative funders and funding structures, such as asset-based facilities.

Consider whether Government grants and schemes are available to support you. There are various Government-backed initiatives designed to help businesses in different stages of their life cycle such as start-ups or growth.

If needed, discuss your options with your suppliers, staff, customers, and landlord to see if there is further flexibility to assist with your cash flow. Communication with your stakeholders is key to ensuring that you have the headroom needed to achieve your goals. It is also important to talk to your accountant. They are likely to have a broad view of the funding market and should be able to recommend suitable providers.

Use the output from your forecasting to support any funding applications. Work with your accountant for help in presenting your cash flow for external scrutiny.

Step 6: Keep reviewing and updating

Cash flow forecasting is a valuable tool, but it will never be perfect. It is difficult to work out assumptions and trends. Make sure you always keep close to your business so you can identify if your current circumstances are different to your plan.

You should re-visit your cash flow regularly and compare it to your actual cash flow so that you can see how accurate your projections were. After a while, you will be able to start comparing your actual position with your projections, ensuring that the cash flow forecast reflects recent experiences.

Update your cash flow to include your latest financial information and review the assumptions you have made. Keep looking at how your decisions and actions will change future results.

Over time, your forecasts will become ever more accurate and valuable as a support tool for your business.

Your cash flow forecast

In summary, the key to developing a useful cash flow forecast is to:

  • Understand what you are going to use the forecast for
  • Choose a cash flow model, making sure it is simple and easy to update
  • Keep reviewing the forecast and amending if required
  • Review your businesses cash needs
  • If you identify cash issues that need to be addressed, make sure you act as early as possible
  • Communication with your stakeholders is key
  • Ask for help and support where needed

Appointing a professional to help plan your cash flow forecast is vital

If you need help planning your cash flow forecast we can help. To arrange a free initial consultation with a member of our team today call 0800 0523 555 or complete our simple online enquiry form.

Last updated: 29th June 2020

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

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