How to Make a Cash Flow Forecast

Intergiro Team
4 mins

  • How to

For business owners, and in particular those running small businesses, cash flow management is a crucial skill that can mean the difference between success and failure. Put simply, if you are struggling to find the cash to pay suppliers and staff, to tax authorities or legal services, or any other expenses and bills, then your business will be left without critical labour, materials, and services, and over the long term, you may incur significant default fees or worse.

Cash flow management is about ensuring you have the funds you need when you need them, however, if you are regularly spending more money than you gross, then there may be cause for concern as to your long-term financial health. Taking control of your cash flow then, requires knowing exactly what comes in and goes out of your business over any given period.

The good news is, it doesn’t have to be difficult, and by using a cash flow forecast to map out your income and expenditure, you can gain greater insight into the way your business operates and ensure you always have the funds you need to hand. Here, we look at how to create a cash flow forecast and why monitoring, analysing, and optimizing your expenses will save you money over the long term.

How to Make a Cash Flow Forecast

Cash flow forecasts can essentially be broken down into four parts, with each providing insight into what makes a healthy business.

1. Set the time period the cash flow forecast will cover

In order to create a workable and practical forecast that can be used to cover a range of eventualities, you will need to set a time period. This should be over a minimum of a few weeks or one month, but can extend anything up to a year. However, it is worth noting at this point that the longer you plan for the less accurate your forecast will be. Additionally, remember that your cash flow requirements may change over the course of the year, for example, with the holidays or during tax season.

How long your business has been operational will also dictate the time period of a workable forecast. For example, businesses that have been running for years will have significantly more data to draw upon, with an established sales pipeline delivering reliable figures. A newer business will not have this luxury; however, the good news is that you can regularly reassess and update your forecast to reflect changing circumstances and integrate new data.

2. List or estimate your income

Whether you have long standing contracts that pay the same amounts on a regular basis, or your income is less predictable and based around consumer sales, detailing your income, whether as a relatively stable figure or an estimate, is the next step in developing your cash flow forecast. This should include sales, as well as non-sales income such as tax refunds, grants or subsidies, shareholder investments, and even loans or other temporary income.

Split your income into weekly or monthly columns depending on the length of your forecast, and make sure you factor in your data from previous years or remain cautious if you are a new business. Remember that this is about cash in hand, so it’s important that you are conservative in your estimates so you can cover your expenses without stress.

3. List your expenses and outgoings

Naturally, listing your outgoings and expenses is the next step in building a workable cash flow management forecast, as this will allow you to take stock and get an overall view of what your business spends each week and/or month. Again, you should use previously gathered data or make estimates that ensure you have enough cash to cover all eventualities, including across time periods where large bills such as EOY taxes or staff bonuses may drain your bank account.

Your list should include all major expenses such as rents, salaries, marketing and advertising bills, raw materials and third-party services, as well as fees for bank loans and any assets you may hold. Adding together your expenses will give you your net outgoings.

4. Calculate your running cash flow

Now, it’s time to subtract your net outgoings from your income, leaving your total running cash flow. Hopefully, this will be a positive rather than a negative figure, however, if you are spending more than you earn, you still have time to rectify the issue. This is one of the benefits of regularly assessing your cash flow forecast, allowing you to be flexible to the changing requirements and fortunes of your business.

Keeping a running total from week to week will allow you to gather the data you need to balance your cash flow requirements across the year. Some months you may record a negative cash flow, and others may be positive. Either way, with a cash flow forecast you have insight into the bigger picture, allowing your business to plan for the future while running at optimal efficiency today.

Other Tips to Improve Cash Flow Management 

Once you have built a solid foundation with your cash flow forecast, it’s a good idea to look at ways to improve the frequency of your positive balance. Here are a few ways to improve your cash flow management as you monitor your income and expenses.

·  Invoice regularly and ASAP

Invoicing early will ensure you are paid asap, giving you more cash-in-hand to play with when managing cash flow and expenses. However, if you have the option, it’s a good idea to invoice on a set day/week of the month and encourage your clients to make payment on a set day. That way, you can predict your income with more accuracy

·  No-spend weeks/months

Integrating no-spend weeks or months can help you build up a healthy bank balance that ensures you always have a small amount of cash ready for emergencies or unexpected expenses. Put simply, cutting out all non-essential spending for a short period of time will allow you to build up a buffer that will cover those months when you end up in the negative.

·  Leverage technology

For Intergiro account holders, accessing comprehensive income and expense reports is quick and simple, allowing you to easily manage spending and intuitively develop cash flow forecasts. Setting up an account takes just a few minutes, and for small businesses who operate globally, the ability to make, take, and monitor payments in a range of currencies enables businesses to operate best-practice financial management regardless of the scope of your operations.

For more information on how an Intergiro business account can help you manage your cash flow effectively, contact us today to discuss your requirements. Alternatively, get more insights into cash flow management and open banking on the Intergiro blog.