Lacking cash flow forecasts can cause real problems in a business. But many company owners don’t know how to prepare one.

In our last blog, we looked at how important cash flow is to a business. A forecast is a helpful tool to spot issues before they become problems.

Over the years since we set up to help small businesses in and around Newcastle, we have helped many of our clients with a cash flow forecast.

It’s not just small companies who prepare them. Large multinational firms are able to report the outlook to their shareholders using a cash flow forecast. It may sound scary but it’s worth doing.

Forecasting is done on several levels, but we share a simple version to help you understand the basics.

Preparing cash flow forecasts

Most business owners should be able to manage a weekly forecast by using software such as Excel. But it’s also a good idea to work on a rolling forecast, which will predict your position for the following 3 months.

If you have that information, it will make you aware of any problems 3 months in advance. This is crucial if you are a manufacturer. Due to the length of time it takes to sell and build products cash can be tied up on working capital.

Using a rolling cash flow forecast means you update what cash you have available at least once a week. Being able to watch your cash position mean you can spot and handle issues in plenty of time.

Any business that ends up with a crisis is probably not being managed as well as it should be.

Bills and overheads

The overheads of your business are faulty easy to predict over the 3 months. Rent, rates, insurance, etc are costs barely change from month to month. Wages are also pretty similar over a 3-month timeframe too.

Look at your past three bank statements to see what regular fixed costs you have to pay. Check invoices or purchase orders so you know what else needs paying.

Predicting sales with cash flow forecasts

Overheads are pretty simple to predict whereas sales can be more difficult. Manufacturers usually have several quotations out with customers at any one time. Using experience, it should be fairly straight forward to accurately predict how many of them turn into firm orders. They know the length of the manufacturing cycle and the terms of the sales. Using this information will help you predict when you will receive cash from the sales.

Retails or wholesalers that sell on an immediate basis can use historical data to predict their sales. Checking figures with the same week the previous year and adjusting them for your current customers will help your prediction.

Maintain your forecast

Set time aside each week to update your cash flow forecast. After doing that, add another week and modify it with any data that is likely to change, such as a customer telling you payments are being delayed.

Once you’ve inputted the new numbers you can see if it will make any difference to your cash flow over the coming weeks.

You can also add a profit and loss forecast to help you estimate how much tax you’ll pay over the next year too. The more details you have the easier it is to predict your forecast but these basic measures can help you.

If you’d like to discuss your cash flow forecast, you can contact us for more details.