How to create a cashflow forecast

They say cash is king, so if you want a long and healthy reign, you’ll need to get to know about cashflow forecasting.

Cashflow forecasting is essential for growing successful businesses. In fact, even if you’re just starting out, a simple cashflow forecast can be incredibly valuable for the confidence it brings.

Don’t feel put off if you’re not on top of this already – you don’t need to be a maths whizz or a financial professional to understand cashflow forecasting. Any business owner can create forecasts and any business owner will benefit from them.

By the end of this article, you’ll know what a cashflow forecast is, why they’re essential for SMEs and how to make your own – and we’ll provide an example to make it as clear as we can.

 

What is a cashflow forecast?

A cashflow forecast is an estimate of your future revenue and expenses for a specific period of time. That could be a one month period or several years.

Forecasting will show you your net cash position for a specific period of time. In other words, whether you’ll have more or less cash than you started with, depending on your expected revenue and expenses.

If you think of your business as a car, your cashflow forecast is your dashboard. It shows you how far you have to go, how long it might take, and when you need to pull over to refuel or fix something.

 

The importance of cashflow forecasting in business

Your cashflow forecast lets you make plans with confidence. To turn to another common saying, knowledge is power. The worst thing you can do is push ahead with a plan without doing the right research first.

The risks run both ways: planning for growth without knowing you can afford it or carrying on as normal as your business loses cash are both ill-advised.

 

The benefits of accurate cashflow forecasting

Cashflow forecasting provides useful information for all kinds of purposes. We’ll list just a few to give you a sense of how valuable forecasting can be.

• Catch problems before they happen, responding in advance rather than reacting in the moment

• Model positive and negative scenarios and stress test your finances

• Look ahead to quiet and busy periods to plan accordingly

• Create a persuasive case to present to lenders

• Track the impact of rising costs

 

Step-by-step guide to creating a cashflow forecast

You create a cashflow forecast by calculating your expected revenue vs. your expected expenses. This can be done for different time frames, which can help you plan for everything from immediate survival to a big expansion:

• Short-term (eg. 30 days)

• Medium-term (eg. one month to one year)

• Long-term (eg. one year to five years)

We’ll give you a full, step-by-step example below. To make it as clear as possible, we’ll use a 30-day forecast as an example.

Step 1) Choose your forecast window and starting data

If you’re going to create a forecast, you’ll need to know your start and end dates. The time period you choose will depend on what you’re measuring and why.

You’ll need to know your cash position at the start of your forecasting window, as you can’t accurately calculate your net cash position without it.

As for your starting data, this is a question of granularity and detail. For a simple cashflow analysis, you can group all income together and all expenses together as single line items. For a more detailed analysis, you might break them down into individual customers or vendors.

Building an example cashflow forecast

For our example, we’ll keep things fairly simple and make a 30-day forecast with a few groups of revenues and expenses.

Step 2) Create a cashflow spreadsheet

Open up your spreadsheet programme and create a new sheet. If you want to do things the old school way, a pen and paper will work just as well.

Create rows to track your:

• Starting cash position

• Cash inflows

• Total cash inflows

• Cash outflows

• Total cash outflows

• Net cashflow

• Closing cash position

Then, add in your starting cash position. This is all the cash you have in the bank at the start of your forecast. Generally, savings aren’t considered part of your cash position. This might change depending on the way you structure your savings and the types of accounts you keep that money in.

Building an example cashflow forecast

You can see what the categories look like in a simple table below. We’ve added a placeholder for our starting cash position so we can begin building out our example.

 

Step 3) Identify cash inflows

Next, you’ll need to add your inflow data (in other words, all your income).

Building an example cashflow forecast

We mentioned at the start of this section that you can choose how much detail you go into. In our example, we’re separating major income streams (sales, interest and commission), but not going as far as listing individual items within those streams.

 

Step 4) Identify cash outflows

After listing your cash inflows, it’s time to look at what money you’ll have going out for your chosen time period.

Building an example cashflow forecast

The level of detail we mentioned in step three applies to your outflows, too. You can choose the level of detail you use – from grouping all expenses together, to separating them line-by-line.

If you want a more detailed analysis or are trying to assess the influence of specific factors, you’ll need to get more granular with your data.

 

Step 5) Calculate your net cashflow and closing cash position

Time for a quick calculation. If you’re using a spreadsheet, subtract your total outflows cell from your total inflows cell (using the =SUM function) to find your net cashflow. If you’re doing this on paper, we’ll leave you to use your favourite mental arithmetic tricks.

Once you’ve got your net cashflow, subtract that figure from your starting cash position to get your closing cash position.

Building an example cashflow forecast

In our example, we’d use the following formulae, where ‘B’ is the second column in the table:

• For net cashflow: =SUM(B6-B13). This subtracts the total outflows from the total inflows

• For closing cash position: =SUM(B1+B14). This adds the net cashflow to the starting cash position. If your net cashflow is negative, you’ll see a smaller closing cash position than you started with

 

 

And there you have it – your cashflow forecast is complete! It’s fairly rudimentary, but that’s no bad thing. It puts the important numbers in context and lets you see clearly what lies ahead.

Step 6) Review and refine regularly

The nature of cashflow forecasting means you’re never finished. The window is always shifting and you need to move with it.

To stay on top of this, you could set a regular schedule for forecasting – for example, on the first of the month for monthly forecasting or at the start of your financial year for an annual forecast.

You might also need to review your cashflow forecasts if a significant change occurs in your business, eg. a client leaving or a materials cost increasing.

 

Using the cashflow forecast for decision-making

Whatever decision you’re making for your SME, you need to make it with confidence. With that in mind, forecasting should be a critical part of the decision-making process.

Forecasting risks

Forecasting is useful for modelling and assessing risks, answering questions like “what would happen if the cost of materials rises by 25%?” or “how long will our cash last if these trading conditions continue?”.

Once you know the answers to those questions, you can create a plan of action to mitigate or prevent those scenarios.

Forecasting growth

You can also use cashflow forecasts to model your growth plans — there are few better ways to work out your SME’s tolerance for growth.

For example, say you want to invest in a piece of equipment that will improve your production capacity by 25%. You can include the costs and potential increased revenue into a cashflow forecast to make sure the numbers add up, showing you:

• What you can afford to spend

• How much your revenue might grow

• What your range is for success vs. failure

Nobody has a crystal ball in business, but nor do you have to resort to making wild guesses. Cashflow forecasting makes all your decision-making – whether it’s surefire or speculative – a safer bet.

Tips for effective cashflow management

Without knowing the details of your business and its operations, we can’t offer any specific tips. There are some broader ideas around best practice that we can share.

Predict and plan for seasonality

You don’t have to sell Christmas trees to be affected by seasonal trends. Most businesses will see trade fluctuate according to the time of year (or even the month).

Building up a cash buffer to account for these highs and lows will help you keep things running without issue or interruption.

Build cash reserves to build resilience

Saving isn’t often the most exciting thing you can do with spare cash, but it’s definitely one of the most valuable.

There’s a limit to a reasonable cash reserve – it’s unlikely that you’ll need five years of expenses gathering dust in a bank account – but until your reserves are strong enough to see you through a difficult period, it might be a good idea to strengthen them.

You could be doing even better if you are able to store them in an interest-bearing instant access account, like Allica’s Business Rewards Account.

Stay on top of trends

Well-managed and regular cashflow forecasting should mean you rarely get surprised by your finances.

Staying on top of your cashflow will keep you agile and able to respond quickly to any changes before they really kick in.

If you know your revenue is going to drop in a few months, you can start to either scale back non-essential spending or redirect it into outreach and sales. You’ll be ahead of the trend, rather than reacting to it as it happens.

Consider asset finance over large cash purchases

If you’ve built up a good cash position, you might feel ready to invest in equipment or machinery to grow your business.

Making that investment with all your accrued cash, however, isn’t necessarily the best choice.

Instead, look into asset finance as a way to get useful equipment while preserving your cash reserves. You can even use a hire purchase arrangement to pay some of the cost upfront and reduce your monthly repayments. We’ve written a complete guide to asset finance, if you want to learn more.

Work with your accountant and use financial tools

You don’t have to do all of this on your own – it’s well worth talking to your accountant about cashflow forecasting to get their expert opinion and assistance.

You can also use finance software to make managing your cashflow easier or even fully automated. Your accountant might have helpful recommendations for this.

 

Better business, better banking

We’ve gone through a lot in this article, with the aim of creating a genuinely useful resource for SMEs all over the UK.

To recap, we started with the basic definitions of and reasons for cash forecasting, then got into the heart of the discussion: creating your own forecasts. Once that was done, we looked at the finer details and offered some tips for things to watch out for and how to make the most of forecasting.

We hope we covered everything, but you can always talk to your Allica Bank relationship manager if you need some more help.

If you don’t already have an account with us, do take a look at what we offer. We’ve combined the best of the older style of banking (relationships and real, human support) with the best of modern banking (great tech that makes running a business easier). It’s how business banking used to be, just better.

 

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