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How to create a cashflow forecast

Understanding when money will be coming in and out of your business is crucial. Read on for our guide to forecast your start-up’s financial future…

A cashflow forecast is an estimate of the money you expect your business to bring in and pay out over a set period of time.

Keeping tabs on cashflow is vital for companies of all shapes and sizes and for start-ups understanding cashflow is  crucial to make sure your business can survive and is sustainable.

Your cashflow forecast can help you to fully understand the business you’re building – it will illustrate how viable your pricing structure is, show you when you’re spending too much on overheads and highlight any risks that your business may face.

Furthermore, creating a detailed forecast of when money will be leaving and coming into your business will help you to plan its future; showing you when you’ll have enough money to, for example, expand your offering or grow your team.

Cashflow forecasts  also give you an insight into when you should look to raise finance for your business.

Creating a cashflow forecast may seem daunting but, when broken down into steps, it becomes a simple process.

Read on for our step-by-step guide on how to create a cashflow forecast…

Quick jargon-busting checklist

  • Overheads: Ongoing business expenses excluding sales
  • Cash inflow: The money coming into your business through sales and other sources of income
  • Cash outflow: The money leaving your business through overheads, costs of sales and other expenses
  • Gross profit: The amount of profit you make purely from sales
  • Net cash inflow: The difference between what you've earned and what you've spent, if you have earned more
  • Net cash outflow: The difference between what you've earned and what you've spent, if you have spent more

Step 1: Create a sales forecast

The first step to forecasting your cashflow is predicting the monthly cash inflow (money coming into your business) you will receive purely from selling your product or service.

First, create a separate row for each of the products or services you expect to make money from.

Alongside these, create a column for each month ahead. It’s advisable to forecast a year in advance – anything less may not be as useful and anything more is likely to be inaccurate – but this is up to you.

Here is an example sales forecast:

Predicting your sales

In this table, you should record the amount you expect your business will be paid for each offering per month, including VAT if you’re listed for it.

To do this, look at your sales from previous years (if this isn’t your first year in trading). Are there any trends? Do you sell more of a particular product or service closer to a certain holiday or season?

Make sure you consider your plans for the business and be realistic – will focusing on marketing a new product or service in March, for example, impact your sales in that month?

It’s also a good idea to conduct market research at this point. Ask yourself questions like ‘Which offering is likely to be more popular, based on what you’ve seen in the market? How have your competitors faired?

Remember that the current economic climate may have an impact on your sales.

When estimating your sales figures for each month, consider the amount of time that typically passes between sending an invoice to a customer or client and being paid by them. If you make a sale to a client in in September, for example, it may be that you don’t receive payment for it until October or even November – try to be as realistic as possible based on your experience. Think about adding in a buffer to cover any potential late payments.

See more: 6 ways your small business can avoid late payment problems

After you’ve planned out your sales projections, tally up your sales per month in a row along the bottom so that you can easily see your sales income for January, February, etc.

Then add a column at the end in which to total up the sales income you expect to make in the year for each product.

Remember: Make use of the formulas on offer in spreadsheet software such as Microsoft Excel and Apple Numbers. Setting up your spreadsheet so that the totals are calculated automatically each time you add, or alter, a figure will mean that you don’t need to spend hours re-calculating every time you need to tweak your numbers.

Step 2: Add all other cash inflows

Of course, sales aren’t the only source of income your business will have; you’ll also need to record all other inflows such as business loans, grants, investment, the sale of an asset, tax rebates etc.

We’ve provided an example template of how your cashflow forecast could be presented, with other cash inflows included:

Remember: While your cashflow forecast doesn’t need to be accurate down to the last penny, it should reflect reality. Of course, the world of start-up business is famously unpredictable, so you’re not expected to produce something that’s 100% accurate on day one (unless you run a fortune-telling business!).

Instead, tweak your forecast as the year progresses.

For example, if one of your expenses goes up in price, one of your products or services proves more popular than expected, or a loan comes in later than you thought it would, change your predictions for the months ahead to reflect this.

Step 3: Create a profit and loss forecast

Now you have a comprehensive guide to your expected cash inflows, it’s time to bring them together with your predicted outflows in a profit and loss forecast.

Studying  your inflows and outflows together will help you to estimate how many sales you will need to make to cover the costs that your business incurs.

Calculate your gross profit

It’s recommended that you calculate the gross profit you’ll make purely from selling your products or services.

While this isn’t an absolutely essential stage of creating a cashflow forecast, it’s advisable to monitor your sales profit in order to better analyse whether you need to make changes – for example, raising your prices or finding cheaper materials – to boost it.

To predict your gross profit, first calculate the amount it costs to create what you sell (your costs of sales) – for example, what you spend on the materials and manufacture of your products.

Take your monthly costs of sales away from your monthly sales income to work out your monthly gross profit, and record this in a new sheet beneath the total sales inflows you worked out in your sales forecast.

Monthly sales income – monthly costs = monthly gross profit

List your overheads

Next in your table, list all of the remaining expected cash outflows as separate rows.

Overheads depending on what your business does but, as a starting point, consider including the cost of the following overheads

  • Your employees’ wages, plus any National Insurance contributions you make
  • Fees you pay to freelancers, accountants, solicitors, and other professionals
  • The taxes you pay
  • Renting your office and the costs associated with running the office such as paying for phone systems, laptops etc.
  • The software packages and subscriptions you need
  • Web hosting
  • Large one-off payments, such as a new piece of equipment

There will almost definitely be a lot of numbers involved here, so to calculate how much everything will cost, look to past receipts and invoices as a guide. You could also search online for the pricing structures offered by the companies and services you use.

Remember to record your costs in the months that you’ll actually be paying them rather than the months in which you incur them.

As with your sales forecast, be sure to total everything up in a row along the bottom and a column at the end.

Here is an example template for your profit and loss forecast:

cash flow forecast 4

Step 4: Finalising  your cashflow forecast

In a fresh spreadsheet, combine your total sales with your other inflows to create a table recording all of the money forecasted to come into your business over the next 12 months.

Below this, do the same for your predicted outflows: your costs of sales and your overheads.

Now these figures are all in one place, calculate  the total income your business makes per month and compare this with the total you spend.

You will either have a net cash inflow (if you’ve made more money than you’ve spent) or a net cash outflow (if you’ve spent more than you’ve made).

Along the bottom of the spreadsheet, add two rows showing your business bank balance at the start of each month (your opening cash balance) and at the end of each month (your closing cash balance).

This is arguably the most important part of your cashflow forecast. If your bank balance is consistently increasing then your business may be secure enough to make plans to expand.

If it’s decreasing, it could be time to cut your expenses, change your pricing structure or look to obtain finance.

Example cashflow forecast:

cash flow forecast 5

Remember: If you’ve drawn up your various forecasts across several spreadsheets, be sure that they are all reflective of one another.

For example, if you increase one of your product’s June sales in your sales forecast, be sure to also change the totals in your profit and loss forecast and your cashflow forecast to avoid confusing yourself down the line.

Click here to download a free cashflow forecast template from The Start Up Loans Company.


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