How to create a cashflow forecast

10 March 2020


Funding and Asset Finance,


Outsourced Accounting

Cashflow is critical – it’s the beating - and occasionally the bleeding - heart of your business. For many business owners, cashflow management is an perennial problem and cause of angst when considering your finances and business forecasting.

Do you need a cashflow forecast? And how does forecasting the future flow of your cash help you to get in control and relieve your worries? Gary Staunton outlines how to create a cashflow forecast and the benefits a forecast brings to your financial stability.  


Understanding the importance of cashflow

There are so many platitudes around the importance of cashflow – but there’s a reason for that. Achieving a positive cashflow position, where your cash inflows outweigh your cash outflows, is a critical goal for every business to aim for. But understanding the financial technicalities of cashflow can be a challenge.

Cashflow is different to profit and loss, or revenue generation. It’s about controlling the timing of when cash goes in and comes out, and it is an ongoing and ever-changing dynamic, not a static snapshot like a balance sheet. For example, if your business needs office space, that might cost you £10,000 per month in rent. But the actual cashflow implications of renting this space might be very different.

There’s a deposit up front to factor in and possibly rent in advance to pay too – not to mention all the additional utility bills you’ll be paying for your power, water and broadband. You’d need to know that the cash required for this office space is available every month, as a rolling financial commitment – and this is where a forecast comes in.  


What a cashflow forecast tells you

Forecasting plans the peaks and troughs in your future cash pipeline. A cashflow forecast gives you a model for looking forward in time and getting a handle on when you may be cash poor – and that information is crucial. It gives you foresight and an ability to plan. Having a detailed cashflow forecast helps you to:

  • React and make preparations for overcoming any gaps – with a forward-looking view of inflows and outflows you can see when there’s a cash hole coming up, and take the necessary action needed to overcome this financial hiccup.
  • Reduce last-minute panic funding – when you know that cashflow will be poor during a given period, you can look at accessing additional finance in a more timely and relaxed way – without running around at the last moment looking for extra funding.
  • Get a structured funding plan in place – a good forecast helps to inform your overall funding strategy, so you can plan out cashflow, working capital and funding requirements throughout the course of your financial year.


How to create a forecast

With the development of online accounting and bookkeeping tools, creating a forecast has become a more straightforward process. But you still need the right recordkeeping, data integration and forecasting tools to achieve a meaningful result. There are a few essential steps to creating your forecast:

  • Maintain accurate bookkeeping records – your forecast is only as good as the accounting data on which it is based. It’s vital to keep your bookkeeping up to date and have clean, organised financial data that you can work with.
  • Export the data from your accounting system – the next step is to export the relevant cashflow data into your forecasting solution. This could be as simple as linking a system like Xero to an integrated forecasting tool, or exporting a CSV file and uploading this data into your own custom Excel forecasting template.
  • Customise your forecast template – you’ll get the most value from your forecast by tailoring it to the exact needs of your business model. So, customising your forecast template is vital if you want to fully understand your cash drivers.


Cashflow as a driver of decision-making

Getting a workable cashflow forecast up and running is one of the most critical jobs I’ll do when I first begin working with a business. Running cash projections always comes first. Other forecasts are important but a cashflow forecast is vital.

Knowing when cash is coming in and out will drive decision-making around so many other elements of the business. A business with no cash will struggle to trade. And this constant need for cash is one of the biggest worries you’re likely to have as a business owner.  


Helping you improve your oversight of cashflow

Entrepreneurs have a high tolerance for risk. But you can easily get burnt if you stick to a methodology of crossing your fingers and hoping that the cash will take care of itself. Building a deeper and more productive relationship with your accountant helps to counter this. Key ways we can help include:

  1. Creating custom Excel-driven forecasts, tailored to your exact cash drivers
  2. Presenting your cashflow information in a user-friendly way that you can easily digest
  3. Keeping you on top of your cashflow information, so it’s current and up to date
  4. Identifying issues and opportunities
  5. Knowing your future tax liabilities and planning out these costs over the year
  6. Assisting you when (and if) additional funding is needed

I know the difference it makes to business confidence when you are truly in control of your cash.  


Talk to us about getting a grip on your cashflow.