Are you losing sleep over unpredictable cash flow? If so, you’re in the right place.
As a chartered certified accountant turned cash flow specialist with over 20 years of experience, I’ve seen firsthand how cash flow prediction can be the difference between struggling to cover working capital and generating cash flow to invest in business growth.
Just like I did for a seven-figure dental practice – through better cash flow prediction, they went from a £52.3k overdraft to a £167.4k positive balance in less than six months.
If you want to understand your current cash position and confidently predict future cash flow to build financial control, just like the dental practice above, you’re in the right place.
Whether you’re a small business owner or an entrepreneur, cash flow prediction allows you to take control of your cash position, enabling you to make informed decisions based on predicted financial data, not gut instincts.
First, I’ll share with you the benefits of predicting cash flow. Then, I’ll share the common challenges and pitfalls I see with my clients in the current UK landscape. After that, I’ll share the components and strategies you can implement to predict your cash flow.
Before we do that, you might wonder why you should listen to me.
As a cash flow advisor, I provide financial advice to small business owners and entrepreneurs across various sectors, with sales figures ranging from £40k to £53.8m annually, helping them manage their cash flow.
I’ve seen that cash flow prediction is becoming more difficult due to financial uncertainty in the current UK economic climate.
By the end of this guide, you will have actionable, practical steps you can take right now to predict your cash flow like a pro.
Let’s dive in.
Why cash flow prediction is important for financial success?
Did you know that 45% of small businesses fail within five years due to cash flow problems?
From my experience, most of these business owners could have avoided this fate if they’d done just one thing: accurately predict their cash flow. Think of it like the Titanic – spotting the iceberg (cash flow problems) beforehand means you can take action and keep your business safe.
What Are the Benefits of Accurate Cash Flow Prediction?
Cash flow prediction empowers you to:
Plan Ahead
You may have heard the expression, “Failing to plan is simply planning to fail.”
So, never get blind-sighted by unexpected bills like tax bills to pay corporation tax, self-assessment or VAT.
Invest Wisely
Cash is like fuel for your business. You need to mobilize (invest) it in the right areas for a bigger and better return on investment. To do this effectively, you need to spot opportunities. Cash flow prediction can help you spot those opportunities like stock brokers predict the stock market.
Manage debt strategically
I have seen so many businesses fail because they couldn’t manage debt. I have also seen businesses scaling by leveraging debt.
From my experience of working with small businesses across different sectors and sizes, I discovered that a business owner’s mindset on how to tackle debt is crucial.
For example, one would make a bad decision to fix long-term cash flow issues with short-term debt at a higher rate of interest.
Another one would tie their debt funding to their business growth plans- they know the cash flow matching concept. Cash flow matching concept is where your project or growth plans is supported by excess cash needed and is funded by a specific source.
What Are the Common cash flow prediction challenges faced by small business owners?
Several external factors unique to the UK make cash flow prediction even trickier. These include.
Economic Factors
- Rising Energy Costs because of inflation: As a UK-based small business owner, you have seen rising energy costs, which have a knock-on effect on increased overhead expenses like travel, utilities, and salaries. It is difficult to predict cash flow if inflation rates fluctuate.
- Interest Rate instability: Since May 2020, interest rates have sharply risen from 0.1% to the current 5.5%. We don’t know whether the Bank of England will decide to lower the interest rate, which makes it harder for you to predict cash flow. The loan interest will vary depending on when you take the loan.
- Tax rates and NI rates instability: Similarly, there were changes to corporation tax changes from April 2023. There are discussions about change in NI. So, rate changes make it difficult to keep up and make accurate cash flow predictions.
Limited scope within the business
Lack of historical data: If you are a new business and don’t have historical data to base your cash flow predictions on, this is a challenge. I always say that you should make the best-educated guess and move on in this situation. Keep the prediction cycle short—first, do it for next month, and then when you start getting more data and becoming more accurate, aim for once a quarter, then once every six months, and so on.
Complexity of financial transactions: You may have multiple bank accounts, departments, or even entities from which you need to gather data. In this case, getting timely financial transaction data to build cash flow prediction becomes a challenge.
Lack of capacity: From what I have seen, you may not have the passion, expertise, or time for accurate cash flow prediction. Don’t worry; resources and professional assistance are available to guide you.
What Are The Key components of a cash flow prediction model?
It is important to consider the key components influencing cash flow to create an accurate prediction model. These components include cash inflows, cash outflows, and the timing of these transactions. Let’s take a closer look at each component:
1. Cash Inflows
Cash inflows refer to receipts received in your bank account. This can include revenue from sales, investments, loans, or any other sources of income. When predicting cash flow, it is important to consider the timing and reliability of these inflows.
2. Cash Outflows
Cash outflows represent outgoings from your bank account. These can include expenses such as rent, salaries, utilities, inventory purchases, and loan repayments. It is crucial to estimate the timing and amount of these outflows accurately.
3. Timing of Transactions
The timing of cash inflows and outflows is critical in cash flow prediction. Understanding when money will be received or paid out allows you to plan for any gaps or surpluses in cash flow. It is important to consider the payment terms of your customers and suppliers and any seasonal or cyclical patterns that may affect cash flow.
For example, in the UK, June, July, and December are considered dry months or slow periods for most businesses I have worked with, such as retail, dental practices, marketing agencies, art galleries, cafes, coaches, and consultants.
By analyzing and understanding these three components—cash inflows, outflows, and timing—you can build a robust cash flow prediction model that accurately reflects your financial situation.
For example, you will see whether your future net cash flow (money incoming and outgoing ) will increase or decrease during a specific period. This will allow you to make financial decisions like hiring a new employee, affordability, and running a new marketing campaign based on prediction rather than gut instincts.
If you are looking to build a customised cash flow prediction model, check this out guide [link]. I cover step-by-step instructions on predicting cash flow in any niche, size, and stage of the business.
How to Build a Basic Cash Flow Prediction Model
Don’t let the term “model” scare you! Getting started with cash flow prediction can be surprisingly straightforward. Here’s the basic process:
- Choose Your Timeframe: Weekly, monthly, or quarterly predictions all have their uses. If you’re new to this, start with a monthly model to keep things manageable.
- List Your Cash Inflows: Think about all the sources of money coming into your business during your chosen timeframe. Include:
- Sales revenue
- Investments
- Loans or grants
- Any other income streams
- List Your Cash Outflows: Be thorough! This includes all the money going out of your business:
- Fixed costs (rent, salaries, utilities, etc.)
- Variable costs (materials, supplies, marketing, etc.)
- Loan repayments
- Taxes (estimate these based on past data/HMRC guidelines)
- Timing is Key: Don’t just list the amounts; note when you expect each inflow/outflow to happen within the month. Payment terms, due dates, etc., all matter!
- Simple Subtraction (For Now): To get your basic prediction, subtract your total outflows from your monthly inflows. A positive number means you expect to have cash left over. A negative number signals a potential shortfall.
How Can You Improve Your Cash Flow Prediction Accuracy?
Achieving accurate cash flow prediction requires a combination of strategies and techniques. Here are the points I have covered to help my clients improve the accuracy of cash flow predictions:
#1. Analyze Historical Data: Your past tells your future.
#2. Consider External Factors: As discussed above, stay updated on external factors and monitor the HMRC site. For example, in the café sector, the VAT rate from 15 July 2020 to 30 September 2021 was 5%; from 1 April 2021 to 31 March 2022 was 12.5%, and then from 1 April 2022 onwards, the VAT rate was 20% until changes by HMRC.
#3. Use Cash Flow-focused apps to avoid making human errors and streamline the process. Choose a tool that aligns with your needs and integrates well with your existing financial systems.
#4. Seek Professional Advice: If cash flow prediction is particularly challenging for you, consider seeking advice from a cash flow expert.
#5. Regularly Review and Update: Cash flow prediction is an ongoing process that requires regular review and updates.
It reminds me of a small retail business selling beds from a store in Knightsbridge, London. By analyzing historical sales data, the business accurately predicted a surge in cash flow during the holiday season. This allowed the business to plan for increased inventory, hire temporary staff, and take advantage of the seasonal demand.
As a result, the business experienced record sales and profitability during the holiday period.
If you implement these five points I shared above, you are on the way to improving your cash flow prediction, which I believe will improve the cash flow health of this retailer.
I encourage you not to overwhelm yourself by seeing the list above; just pick one point now and implement it in your business.
You can tag me on LinkedIn if you want to share your results/progress.
Tools and software for cash flow prediction
Many cash flow-focused tools and software can help you simplify and accurately predict cash flow quickly.
If you want my guide on investing in cash flow software, check out the ultimate cash flow software buyers guide.
Analyzing and interpreting cash flow predictions
Once you have created your cash flow predictions, it’s time to analyze and interpret the results effectively. Here are some key points to consider when analyzing cash flow predictions:
1. Variance Analysis
Compare your actual cash flow against your predicted cash flow to identify any variances. This will help you understand your predictions’ accuracy and identify areas for improvement.
2. Identify Trends and Patterns
Look for trends and patterns in your cash flow predictions. Identify high or low cash flow periods and analyze the factors contributing to these trends. This analysis will help you anticipate future cash flow patterns and make informed decisions.
3. Cash Flow Ratios
Check out cash flow ratios such as the operating cash flow ratio, cash flow to debt ratio, and cash flow margin. These ratios provide insights into the financial health and efficiency of your business or personal finances.
4. Scenario Analysis
Conduct scenario analysis by adjusting key variables in your cash flow predictions. This will help you understand the potential impact of different scenarios on your cash flow and make contingency plans accordingly.
By analyzing and interpreting your cash flow predictions effectively, you can gain valuable insights into your financial position and make strategic decisions contributing to your financial success.
TIP
Start with the ratios that you control. You can do a variance analysis of operating cash flow, whereas it is difficult to do scenario analysis as there are factors not dependent on you or controlled by you.
Your Next Steps: Take control of your financial future through cash flow prediction
Ready to take your cash flow prediction to the next level?
Watch Video Content Summarising the Key Aspects Of Cash Flow Prediction
Here’s the video [LINK]
Expert Talk Series: Watch My Conversation With Amit Shah, a Chartered Accountant, On the Topic of cash flow Prediction
Here’s the video [LINK]
Take the Interactive Quiz To Test Your Understanding of Cash Flow Prediction
Take this 60-second quiz to test your understanding of cash flow prediction.
Deepen your understanding of cash flow prediction with further contents
You can go deeper into cash flow prediction topic by exploring these sub-topics below to become fully competent in this area :
- cash flow prediction model
- cash flow prediction machine learning
- cash flow prediction vs cash flow forecasting.
Hire my services To Simplify Your Cash Flow Prediction
You can hire my services to build your custom cash flow prediction model. You can book a free no-obligation consultation by clicking here to speak to one of my team members. (calendy link)
Cash Flow Prediction FAQ’s
What is the difference between cash flow prediction and cash flow forecasting?
The difference between cash flow prediction and cash forecasting is that prediction tends to focus on the immediate future with a higher degree of certainty, such as an amount derived from fixed invoices. Whereas forecasting often encompasses a longer time horizon and can include a wider range of possible scenarios.
If you want to go deeper into the differences between the two, check out my article- Cash Flow Prediction Vs Cash Flow Forecasting: What You Need to Know as a Small Business Owner.
What is the difference between cash flow prediction and cash flow projection?
The difference between cash flow prediction and cash flow projection is although both involve forecasting future cash flows, prediction focuses on the most likely outcome based on existing data, whereas projection explores a range of “what if” scenarios, helping you plan for both the best and worst cases.
If you want to explore the differences between the two more deeply, check out my article, Cash Flow Prediction Vs. Cash Flow Projection: A Small Business Owner’s Guide.
Do I need cash flow software to predict cash flow, or can I use a spreadsheet?
It depends on the size of your business and the volume of transactions processed monthly. From my experience working with clients over the years, if your business processes over 100 transactions a month, it is advisable to use cash flow software, as it saves time and avoids manual errors.
EXTERNAL RESOURCES
Information from these sources will be useful for you in preparing accurate cash flow predictions.
- Bank of England: Track current interest rates and analysis of how changes may affect your business.check Bank Of England Link here
- HMRC (UK): Find the latest tax deadlines, rates, and guidance for small businesses in the UK. Bank Of England Link
- Download: Cash Flow Prediction Step-by-Step Guide and template
