• Zoe

How to forecast your cash flow

Updated: Sep 26, 2019



Do you know whether you'll have the money in the bank to pay your VAT bill next quarter? It's a question our clients often need the answer to so we prepare and monitor cash flow forecasts as part of our management reporting services to ensure our clients are in the know.


But if you don't have an expert to help and you want to build your own forecast for the month, quarter or year ahead, where do you start? Here are the steps we suggest you follow.


1. Decide on the period you need to forecast for

We find that three months is a useful period to focus on as it will pick up your next bill which can often come as a bit of a shock to small businesses, but we also do longer term forecasts for twelve months or more depending on our clients need. Forecasting further out can be less reliable as things change, but you can monitor and change your forecast at any time, the main thing is to get started. I suggest you layout your forecast as a table with income and expenditure categories down the side and months (or weeks if you prefer) along the top.


2. What's your bank balance right now?

This has to be the starting point so check your bank statement. Take into account all the accounts you have, some of our clients also have money tied up in their Paypal accounts so make sure you note all of these balances down. Then make sure you take into account any uncleared transactions which haven't quite made it in or out of the bank account yet as you don't want to double count those transactions when you move on to thinking about your forecast.


3. What's coming in?

Your main source of income will almost certainly be sales so use your annual budget to forecast how much money you expect to receive into the bank one month at a time. If you invoice your clients, also keep in mind how long they're likely to take to pay you after you issue that invoice (your accounting software should be able to tell you this figure).

Also take account of any other sources of income, have you agreed to some equipment, are you expecting to receive a grant or a cash inflow from an investor?


4. What's going out?

Now look at your budget to see what your expected costs are and think about the timing so you can allocate them against the relevant month. Think about your regular costs, your salaries bill, rent, utilities, software and materials costs. Then think about any one off bills which come up such as your VAT bill, your corporation tax bill, one off events or any repairs and maintenance bills you're expecting to come up perhaps for your office. Looking back at your accounts for the previous financial year should help prompt ideas about what these costs could be if you don't have the detail set out in a budget.


5. Build the forecast

Once you have all of this data, you can build the forecast. If you only have a few incomings and outgoings you might be able to just list out your commitments (it really is as simple as opening balance + money in - money out = closing balance) but for more complicated businesses, a table with columns for each month will most definitely be the best way to lay things out. Having worked with several businesses on budgeting recently we know that tables of numbers aren't particularly appealing to look at, so we build our forecasts using beautiful graphs and visuals to help our clients understand what's going to cause a spike or a troublesome month for cash flow to help them plan and you might choose to work with a bookkeeper or accountant to help you with this.


6. Monitor it

Finally, once you've built your forecast you should monitor it regularly. We keep forecasts up to date monthly for our management reporting clients, and monthly is usually enough although if it's a particularly tricky time for cash flow you might choose to keep yours up to date weekly just to keep you informed and on track.


If cash flow forecasting is a troublesome area for you, have a look at the services we offer growing businesses or get in touch for more information.

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