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Why cashflow forecasting is important for your business

Why it's important to have a good working knowledge of your incoming and outgoing cash

The old adage cash is king is all the more important when in the midst of a downturn, but even in prosperous periods it’s important to keep an eye on your cashflow. Many profitable businesses have gone to the wall after cashflow problems.

Poor cashflow is one of the number one causes for businesses to fail. Some businesses can be profitable on paper, earning more than their outgoings, but if the cash isn’t in the bank to buy stock and pay staff you’ll soon find yourself in trouble.

Good cashflow forecasting isn’t just important for your own business management. You may be required to provide this kind of detail if you need a loan from the bank during your first few months of trading. The forecast will allow you to identify the amount and origin of cash coming into your business and the amount and destination of cash being paid out during any given period of time.

Generally you’ll produce a forecast for a quarter or year in advance, but during the early stages of trading you might want to do this more frequently, such as a month in advance. When compiling a cashflow forecast it’s really important that you don’t overestimate your incoming cash.

A cashflow statement shows your business’ incoming and outgoing money, enabling you to assess how much money you have at your disposal at any one time.

Here is an example of a cashflow forecast:

MONTH 1 2 3 4 5 6 7 8 9 10 11 12 YTD
Receipts
Debtors 8,297 8,572 6,798 7,569 7,719 8,071 7,765 7,175 6,179 7,637 5,978 7,173 88,933
Cash 276 421 1,403 1,386 874 835 1,142 1,607 1,946 818 2,036 918 13,662
TOTAL Receipts 8,573 8,993 8,201 8,955 8,593 8,906 8,907 8,782 8,125 8,455 8,014 8,091 102,595
Payments
Purchases 1,687 1,967 2,173 2,469 2,284 2,982 2,642 2,381 2,974 3,129 3,367 2,894 29,949
Rent 2,160 - - 2,160 - - 2,160 - - 2,160 - - 8,640
Rates & Utilities 528 528 528 528 528 528 528 528 528 528 528 528 6,336
Telephone - - 509 - - 521 - - 539 - - 517 2,086
Wages & Salaries 2,750 2,750 2,750 2,750 2,750 2,750 2,750 2,750 2,750 2,750 2,750 2,750 33,000
PAYE 1,018 1,018 1,018 1,018 1,018 1,018 1,018 1,018 1,018 1,018 1,018 1,018 12,216
VAT 102 - - 47 - - 156 - - 174 - - 479
TOTAL Payments 8,245 6,263 6,978 8,972 6,580 7,799 9,254 6,677 7,809 9,759 6,663 7,707 92,706
NET Operating Cash Flow 328 2,730 1,223 (17) 2,013 1,107 (347) 2,105 316 (1,304) 1,351 384 9,889
Fixed Asset purchases 539 1,299 3,675 5,513
Loan repayments -
NET cash inflow/(outflow) (211) 2,730 1,223 (17) 714 1,107 (347) 2,105 (3,359) (1,304) 1,351 384 4,376
OPENING BANK BALANCE 1,628 1,417 4,147 5,370 5,353 6,067 7,174 6,827 8,932 5,573 4,269 5,620 1,628
CLOSING BANK BALANCE 1,417 4,147 5,370 5,353 6,067 7,174 6,827 8,932 5,573 4,269 5,620 6,004 6,004

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