At the time of writing, cash flows for most businesses around the country are coming under real pressure. Therefore, now, more than ever, you need to plan out your cash flow to ensure you spot where any pinch points may arise.

I decided it would be useful to write a piece on how to prepare a cash flow forecast as it can be daunting if you’ve never prepared one before.

Tips for getting started on your forecast

The first point to make when it comes to preparing a cash flow forecast is that this is not a profit and loss. This means it is not based on the date invoices are raised but the date they are paid. We are simply going to be looking at your cash in and out.

I would use an excel spreadsheet to build the cash flow – I know, typical accountant, we love our spreadsheets! If you use accounting software to record your transactions it may be that you can export historical data into a spreadsheet to start the cash flow off and this would give you a good base on which to start. I would break down the cash flow month by month and this can then be forecast for as many years as you decide.

The main areas of the cash flow

Sales

It’s important to remember that the amount in this row will be the date your sales invoice is expected to be paid, not the date you raise the sales invoice. If you are a cash business, this will be your expected sales for each month.

Variable costs

This will be any costs that move in line with your expected sales for each month. You can work these out by looking at the historical cost of these compared to sales in past months. Again, you will then need to consider the terms with each supplier. For example, one may be 30 days and another 90 days which can make a big difference to your cash flow.

Fixed costs

These are the costs you are going to incur regardless of whether you achieve sales of £1 or £1,000,000. Examples would be costs such as rent and salaried employees. Again, you need to look at the terms for any invoices and ensure you slot them into the correct month.

Other costs to consider

  • If you are VAT registered, you need to build in your monthly/quarterly VAT payment. Also, if you deferred your VAT payment as allowed by the government as part of the support package for COVID-19, this will be payable by the 31st March 2021 and will also need to be built into the cash flow.
  • If you are operating as a company, any corporation tax will be due 9 months and 1 day after your year end and this will need to be included in your cash flow forecast.
  • If you are self-employed, are you paying your personal tax out of the business account? If so, these payments need to be included. Your 31st January 2021 payment may be a lot higher if you took advantage of the government support to defer the July 2020 payment.
  • Any large capital purchases you need to make, for example if the business needs a new van.

Once you have prepared the cash flow forecast, you will be in a much better position, as you can plan for any pinch points and you have time to obtain funding if required.

Funding options to consider for cash flow

  •  Renegotiate payment terms with your suppliers, giving you longer to pay.
  • Offer a discount for early payment of sales invoices; this may be cheaper than obtaining a loan and paying interest.
  • Apply for a bounce back loan from the government (for more information, you can read our blog on this topic).
  • Look to arrange or increase your overdraft with the bank, although this can be an expensive option.
  • Delay any capital purchases that aren’t vital and can wait.
  • Look to finance the purchase of capital items rather than buy them outright.
  • Take a standard loan from the bank.

The above is a brief summary of how to start preparing a cash flow forecast. I do hope you found the above helpful and, if you have any questions, please do get in touch.

I have prepared a standard simple cash flow template and if you would like a copy please email me at dan@sidaways.co.uk.