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This new guide will show you everything you need to know as a busy small business owner about how to accurately do a cash flow forecast and execute at a  lightning speed.

Maybe you are a sole trader or a business leader here because you want to apply for business loans and want to know whether you have excess cash to make loan payments or debt Repayments to ensure you meet debt covenants.

Perhaps you are here because you want to do short-term liquidity planning to ensure staff salaries, minimum salary for yourself, labour costs, and incoming costs as a part of your day running costs are covered.

Possibly, you are here because you want to measure business performance and want to be involved in financial forecasts so that you can make informed business decisions investing in capital projects to grow your business profitably and sustainably.

As a small business owner, you need to keep an eye on cash because as a small business owner normally do not have much cash left at the month end. So this guide on how to do a cash flow forecast will help you make informed decisions on how to manage your cash flow.

First, I will show you the components needed for a cash flow forecast per your business model.

Then, I will share with you how I prepare cash flow forecasts for all my clients step by step.

Sounds good. Let’s dive in…

Essential Components to do cash flow forecasting

Before we go further, you need to be clear on the components and cash sources that make up the cash flow forecasting statement.

  1. Cash Inflows: Money coming in from (Sales, Loans, Owner Investments)
  2. Cash Outflows: Money Going out (cost of sales, variable costs, staff wages, national insurance, advertising costs

 

Then, you need to be familiar with the terms that are included in the forecast.

  • Future Income: Money expected to come in future
  • Tax Payments– Money you pay to HMRC for VAT, PAYE and Corporation tax
  • Tax Refunds- Money returned from HMRC
  • Tax Rebates- Money or credit you receive from the government for using their approved tax schemes.
  • Previous month– Month that has just ended where bank transactions have been allocated properly and processed in the cash flow template. As a result, actual cash flows are recorded and compared to forecasted cash flow to determine the variance.
  • Incoming cash– refers to different forms of income that will be included in cashflow forecast template. 
  • Time period–  Time frame used to prepare the forecast. For example, daily/weekly/monthly/quarterly/annually
  • Bank statement- a statement that provides money in and money out data. It forms the source of information to prepare the report.
  • Current month- The month on which you are working to prepare the cash flow forecast. 
  • Negative cash flow refers to the closing cash balance as a negative cash flow figure.
  • Positive Cash flow refers to the closing balance as a positive cash flow figure.

Once you understand the terminologies commonly used to prepare the cash flow forecast, we need to pick the right forecasting model for you. 

To do this, you need to be clear on about your business model. 

Understanding your Business Model

What do I mean by understanding your business model?

What I mean is your business model dictates the cash flow model to adopt.

Let me explain with an example of an e-commerce business that sells sofas.

The business model is made to order. This means the supplier order is placed when the customer buys the sofa. Then, it takes around 12 weeks for a custom sofa to be made and delivered to the customer.

So, it means the business receives the money first and then uses it to pay direct suppliers. We need to capture this timing of cash inflow and outflow over time to understand future cash flows. In this case, the time is roughly 12 weeks.

As a common practice, most business owners and accountants opt for a 13-week cash flow forecast as it is one of the most accurate cash flow forecasting processes. It may or may not work according to the cash flow, cash movements, and actual cash flow data you have readily available.

Here’s the kicker and not a good practice that most business owners follow.

Please do not fall into this.

Most business owners are asked how far they want to make cash flow projections without considering the timing aspects of cash receipts and payments. Consequently, the prepared cash flow forecast may not be helpful as it fails to give you the financial insights you need to figure out the financial health of your business.

So, you might be wondering how you choose the right cash flow forecast model for your current specific cash levels right?

Let’s move on to the next section, which covers this in more detail.

Choosing the cash flow forecast model to reflect the business model- Frequency

There are various types of Cash Forecasting models you can choose from.

  • Daily
  • Weekly
  • Monthly
  • Quarterly
  • 13-week
  • Annually

 

You can decide which one to go for your short-term or medium-term cash flow forecast or even long-term based on the following:

  • Your business needs
  • Timing of receipts and payments
  •  The level of detail required
  • Reflecting on your business model as discussed above

 

If you are not sure about this topic, I have covered this in detail everything you need to know about cash flow forecasting model

Choosing the cash flow forecast method to reflect the business model

Once you have chosen the model which is right for your business, the next step is to choose the right forecast method.

I have come across people interchanging the words model and methods, and they are NOT the same.

If you want to go deep on this, I have covered this in detail. (Cash flow forecasting methods)

For now, you need to know there are two types of methods:

  1. Direct Method
  2. Indirect Method

You choose which is right for you that is easy to update regularly and accurately.

Tools for forecasting

When you have chosen the model and the method, the next cash flow forecasting process is to choose the tool to do forecasting.

Your options are :

  • Spreadsheets- such as Excel and Google Sheets. (Here’s the excel cash flow forecast template you can download and make it your own.)
  • Accounting Software solutions such as  QuickBooks Online, Zoho, Xero 

 

By this time, you have everything you need to do cash flow forecasting, which are :

  • Model
  • Method
  • Mechanism (Tools)
  • Materials ( Components)

Let’s proceed to create a cash flow forecast step by step.

5-step process to prepare cash flow forecast – Shishir Khadka

Here’s the video if you prefer to watch rather than read.

1. Bring Cash Flow Statement Up to Date

  • The first thing to do is to do data collection.  Ideally, collect the last 12 months – month-to-month historical bank transactions. 
  • Gather information on upcoming expected sales using sales forecast
  • Gather information from the procurement department or your list of anticipated costs and expenses 

 

2. Prepare Cash Flow Forecast Using This Template

Then, you record the transaction amounts in the cash flow template into the cash inflow and outflow section. If you are unsure how to do this, watch the video in this section.

3. Check With Someone for a Sanity Check and Have Clear Communication

Once you have prepared the forecast statement, having someone for a sanity check is always a good idea.  After all, we are all human; we can all make mistakes. You can avoid common mistakes like:

  • adding wrong line items
  • Transposition errors ( for example, inputting 39 instead of 36 )
  • wrong formula

4. Make Changes Based on What Future Cash Balance looks Like

It is important to review the cash flow forecast and adjust your forecasted money-in and money-out figures to anticipate future cash position as accurately as possible. This will help you make changes to your cash flow decisions to achieve the cash position.

It has been one of my favorite things to do to maintain a certain level of cash closing balance for my clients.  As a best practice, regular reviews, ideally month, are good to follow. If you are pressed for time, you can use forecasting tools to help you save time and hassle to be on top of this.

 

5. Compare Each Month’s Actual Running Balance vs Forecast and Make Changes

Adjust forecasts based on actual numbers and changing circumstances

Tips for more accurate forecasting

Here are some tips for more accurate forecasting :

  • Be conservative with revenue estimates
  • Account for seasonal fluctuations
  • Regular updates for unexpected events or changes
  • See input from different departments/team members

 

Common pitfalls to avoid

You might want to pay attention to these common pitfalls I often see.

  • Overestimating revenues
  • Forgetting or underestimating irregular expenses
  • Not updating the forecast regularly
  • Ignoring the forecast once made

Seeking professional help

If all of these things are too overwhelming for you, then perhaps getting professional help might be the solution you are looking for.

You might be thinking. I already have a bookkeeper or an accountant. Can I not get this report directly from them?

Yes, you can.

In some cases,  when you are making big investment decisions or want to have someone who is solely specialized in this area, hiring a cash flow coach can be a good move for you.

Benefits are cash flow specialists are solely focused on cash flow, whereas accountants /bookkeepers do many aspects of accounting. 

Think of it more like a GP vs. Surgeon. 

Before I let you go, I thought I would share with you some frequently asked questions categorically on this topic from my experience as a specialist in this area in the last 19 years.

FAQ