Why It’s Important to Prepare A Cash Flow Forecast

Running your own business can be difficult, gaining and maintaining clients, invoicing and chasing payments as well as tracking income and outgoings.

On top of that you need to think about investing in the business as well as forecasting expenditure and income for the next year.

Many people believe if their business has money in the bank then they must be doing OK. However, unless you have a firm grasp of your business’ cash flow you will not be able to make decisions about the future; long-term or short-term.

Without this understanding, it is difficult for you to even know how much you can draw from your bank account whilst ensuring all your business expenses will still be paid.

What is a cash flow forecast?

In short, a cash flow forecast is a detailed plan which shows what money is expected into the business over a specified period of time, and what is due to be paid out over that period. Cash flow planning can cover anything from a few weeks to many months. Plan as far ahead as you can predict with reasonable accuracy.

A cash flow forecast is different to a profit forecast as it only looks at the movement of money. A profit forecast will include projected sales and expenses and predict the difference between them.

How to prepare a cash flow forecast

It doesn’t have to be complicated.

To have a truly efficient cash flow forecast you need to get to know your business; inside and out.

Firstly, make a comprehensive list of all your outgoings (investments, bills, repayments, tax, interest etc); essentially anything that needs to be paid for the running of your business. Don’t forget those annual bills that have a habit of surprising you every year when they fall due! Having specific payment dates will help to prepare a more accurate forecast.

Then list your income, remember it may not be just from payments from clients, it could include payments from investments, loan payments, tax rebates, property rental etc. – of course with dates, even if they are only approximate.

From this data you will be able to plan your cash flow forecast carefully for any given period.

Knowledge is power

Staying on top of your cash flow will help you see if you’re going to run out of money – and when – so you can prepare ahead of time.

Armed with this knowledge, you’ll be well placed to make important decisions about your business.

It may show you that you need to:

  • cut overheads
  • find new investment
  • or spend time generating sales
  • keep better track on late payments

Or it will help you decide if you:

  • Need to make savings now against leaner times ahead
  • Could start making a new product, or offer a new service
  • Could start selling in a different country
  • Can afford to recruit a new member of staff
  • Should outsource some of your day-to-day tasks
  • need more space for your business, can you afford to rent an office or workshop rather than working at home
  • Can repay some of that director’s loan, pay yourself a dividend or give yourself a raise!

Forewarned is forearmed. Through careful planning you can identify the financial health of your business and how well you would deal with an unexpected payment.

What next?

If you would like help with preparing a cash flow forecast or stabilising your cash flow, then why not book a call with Confident Cashflow and get your business back on track.

Schedule time with me