Lewis Surtees Assistant Accountant

What is cash flow forecasting?

Cash flow forecasting is used to provide an estimate of the expected flow of cash coming in and out of your business over a given time. Cash flow forecasts may cover anywhere from 30 days to a year; often companies opt for 12 months rolling, some companies do more.

It is an extremely important tool to have when it comes to making decisions about activities such as funding, capital expenditure and investments. You may have business goals set, but it's crucial to have a cash flow forecast as it gives you a plan to work to and helps enable you to be where you want to be in a year’s time. 

Why is it important? When it comes to business decisions, you want to make the most informed and strategic decisions to help you reach your business goals. Cash flow projections enable you to assess whether you need to re-consider big investments, or if you have enough cash available to allocate and invest.

It also highlights where and when your business could struggle to meet cashflow demands, enabling you to take steps in advance to secure additional finance or revise plans to avoid the risk of running out of cash. 

What objectives should you consider? Each business is individual and therefore objectives will vary. However, some common objectives can include liquidity risk planning, reporting requirements, developing strategies and attracting financing. 

What do you need to include in a cash flow forecast?  Ensure when you are creating your cash flow forecast that it is a three-way forecast. This is a financial model which combines three key reports into a consolidated forecast. You will need to include your balance sheet, income statement (Profit & Loss) and your cash flow projections.

The benefits of a three-way forecast are that it gives your numbers much greater accounting integrity, making it more accurate and giving you the best possible insight into your future financial position. Below are some key things you need to think about before preparing your forecast: 

  • Opening balances – it is important to include your opening cash balance, as you can then see how your forecast will affect your current cash position. 
  • List all your income – Include all the income you have flowing into your business, such as sales, tax refunds, grants, investment and royalties or licence fees. Make sure that your sales predictions are realistic, you want the cash flow to be as accurate as possible.  It is important to take into account the timing of cashflows where sales and purchases are made on credit, as this can have a significant impact on the resultant cash flow.
  • List all your outgoings – What money will your business be spending? Include rent, salaries, materials, assets, loans, marketing spend and tax bills. 
  • Work out your running cash flow – Once you have established your incoming and outgoing expenditure, you can work out your running cash flow. When doing this you will either end up with a positive or negative cash flow figure. You are then able to keep a running total, and over time you will gain a better picture of your cashflow. 

Every business is different; therefore, it is important to remember that every cash flow will look different. However, it’s important to ensure they are as accurate as possible, it is something that takes time and experience to get right. It is worth considering getting someone with the relevant expertise to help.

As you refine your forecasts and get them more accurate, you’ll find that you’re able to take control of your business and your cashflow by taking action ahead of time every time, so you make it to the other side and achieve the goals you were aiming for.

Whether it’s helping you with cashflow forecasting and scenarios, or implementing regular management reports -  Get in touch for support and advice. Let’s work together to grow and strengthen your business.

Please note: This article is provided for information only and was correct as at time of writing (02/02/23). Any lists and details provided above are not exhaustive and are not intended to be full and complete guidance.  No action should be taken without consulting detailed legislation or seeking independent professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted.