What is a cashflow forecast and why do you need one?

While any business is ideally generating a steady flow of income how do its managers know it is enough to cover the operation’s various outgoings? This is where a cashflow forecast comes in. 

It is not just a bookkeeping exercise, it is vital to ensuring the longevity of the business. For one thing, It is not always grasped that cashflow can be more important than profit. A company can easily go under due to being unable to meet immediate expenses while waiting for a big invoice to be paid.

Cashflow management is of particular importance for seasonal business that may have relatively steady expenses but wildly varying income. In additional, growing businesses are surprisingly vulnerable to cashflow problems. On the face of it everything looks positive: they have a happy and growing customer base, so what’s the problem? Well, an expanding company is making heavier demands on its working capital by buying more and more stock and perhaps hiring more staff. If some customers are on easy credit terms or a relate payers then suddenly the company’s position can become extremely precarious.

Not managing cashflow well could be likened to setting off on a long journey without enough petrol in the car. The vehicle may be a brand new model that’s completely reliable but none of that matters if it runs out of fuel – the destination will remain far off in the distance.

Even a new company whose income is uncertain should have a cashflow forecast so that its owners know what level of revenue is sufficient to sustain its operating costs. It is crucial to know that you have enough cash to cover at the very least the next month’s costs. As the months pass and the forecast is updated, what started out as guesses or estimates will become reliable data on which business decisions can be based. Many new businesses make a loss in their early days, so the first profitable month must as soon as possible be turned into two consecutive profitable months and so on.

The forecast will enable owners to anticipate tight periods by, where possible, rescheduling payments, bringing forward income, postponing or cancelling outgoings, and slashing costs. This flexibility that the cashflow forecast enables is what makes it such a precious tool.

Being on top of your income and expenditure enables you to:

• plan business activities and allocate resources; 
• ensure you are allocating appropriate resources to the different parts of the business;
• make realistic decisions about the business’s expansion;
• understand how well your company is doing;
• judge how much debt it is safe to carry; and
• have an appropriate level of inventory.

And, hardly less importantly, being on top of cashflow should mean a good night’s sleep for the owner, free from fretting about paying wages or looming VAT bills and secure in the knowledge that the money coming in is more than the money going out.

Creating a cashflow forecast

A sensible cashflow forecast will break down inflows and outflows into their component parts and give you visibility of the company’s cash balance at any point over the forecast. It must be at least as long as your cashflow cycle: that is the period including from when cash goes out (say to buy stock) to when it returns to the business (the stock is sold).

Here we are only concerned with an operating cashflow forecast. The first consideration is what length of time the forecast covers.Generally, businesses will opt for one that is anything from a few weeks to many months or a year, but bear in mind the further out into the future the forecast goes the less accurate it will be. As well as a fixed-period forecast you could consider a rolling cashflow forecast. 

Income

First off, using whatever spreadsheet software you have, setup the forecast in columns of weeks or months with a row for each type of income. A 13-week forecast might be a good length of time to start with, which can be shortened or lengthened depending on the reliability of forward data.

Then list all the cash you have coming in, starting with the opening balance in the company account.

Sales can be estimated from previous years but do try to be realistic about when money from future sales will land in your bank account: itis important to always keep in mind the forecast is for future income not future sales, and don’t add income from sales that have not been finalised.

You should also have a range of non-sales income. This could include tax and other refunds, grants, investments and insurance payouts. 

Adding together the total at the foot of each column will give you your net income.

Expenditure

For outgoings, follow the same weekly or monthly structure as for income. Costs would typically include rent, salaries, including your own salary, national insurance, pension contributions, taxes, purchase of assets,marketing and advertising, interest and raw materials. These should all be totalled up in the same way as income.

Running cashflow

For each week or month, deduct net expenditure from net income. This will result in either positive cashflow (more money coming in than going out) or negative cashflow (more money going out than coming in). The forecast should conclude with a closing balance.

A run of negative weeks or months is a big red flag. If this is the case you need to budget carefully, trim costs where you can and plan ahead to make sure there is money in the bank to cover regular costs such as salaries and tax payments.

A succession of positive weeks or months means you can think about investing in the business and expanding. And do keep a copy of the original forecast so that you can compare it with the actual data at the end of the forecast period. 

Types of cashflow forecast

Some companies combine forecast cashflow with actual cashflow in one document. This means it is as accurate as possible but those that do so should ensure it remains possible to compare forecasts with actual income and expenditure.

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Short and long term

A company may also have a daily cashflow forecast so the owner can keep an eye on the business  day to day plus a 13-week or rolling or annual one to give an overview of the company’s trading health. An annual forecast is useful for strategic planning and assessing the affordability of capital projects.

Mixed period

A mixed-period forecast combines different time periods. For example, a six-week forecast could start with two weeks of daily cashflow then have four weeks of weekly cashflow. This enables accountants to focus in on a given period while also being able to see the bigger picture.

Direct or indirect

Direct forecasting is based on data that is updated daily and is used to inform short-term decision-making and planning. Indirect forecasting relies on projections and income statements, and is intended for planning and budgeting. An appropriate period for the latter could be 13 weeks.

Many businesses use dedicated cashflow forecasting software. Spreadsheets are a good way to start but can be time-consuming to update if they rely on manual inputs. A software package will pull in data from bank accounts, enterprise resource process software and elsewhere, often saving large amounts of time. 

VAT

One technical point here is that sales forecasts for businesses that are VAT-registered will show income exclusive of VAT. However,cash receipts will show income inclusive of VAT since the VAT will be part of the bill or invoice that the customer is paying. Make sure you don’t let this make you think the business is more profitable than it is in reality.

Staying in control

While the software to create a cashflow forecast is available to anyone, it is always useful to seek professional advice in setting one up. Each business is different and an article such as this is no substitute for professional advice from someone who understands your business and wants to help you to make it grow. 

For advice about any aspect of your business please contact Finsbury Robinson. We are a full-service tax, accountancy and business advisory firm,and our friendly and highly experienced team is available on 020 8858 4303 or via email at info@finsburyrobinson.co.uk

Angus Walker 11.03.2025