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How to create a cashflow forecast (and why your business needs one)

Understanding when money will be coming in and out of your business is crucial. Discover how to predict your business's financial future with our dedicated guide...

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Cash keeps your business alive.

You’ve got countless responsibilities as a small business owner, constantly working to keep all those plates spinning.

But it's cash that keeps it all going – run out of cash, and you won’t have a business for very long.

This makes cashflow – the money coming in and going out of your business – pretty darn important.

For your business to thrive, you’ll need to have a good idea of how much money is likely to flow in both directions – and a good cashflow forecast makes it much, much easier to get your head around this.

Creating a cashflow forecast may sound intimidating, but it’s actually quite straightforward.

This handy guide will tell you everything you need to know. We’ll cover:

Benedict Gatherer

And, throughout, we’ve got top tips from accounting expert Benedict Gatherer. Benedict is a Chartered Accountant who has helped countless small businesses through his accounting practice The Copper Coins. He's also written a book on accounting, and produces the most useful accounting videos on the web at his YouTube channel Accounting Tea Break.

We’ve also created a handy example cashflow forecast that we’ll refer to throughout the guide, which you can use as a starting point for your own cashflow forecast.

Example sales forecast - How to create a cashflow forecast edit

Before we properly get started, let’s break down some pesky jargon (which, for the most part, is just fancy words for simple things).

If any of this doesn’t make sense, don’t worry – it will all be explained in the guide proper.

Obviously, if you’re feeling confident already, then feel free to skip this and dive straight in.

Cashflow jargon buster

Overheads – The money you spend on your business that doesn’t directly relate to your sales. For example, if you run a pottery business, the clay you buy to produce your pots would be part of the costs of sale, but the electricity that powers your studio would be an overhead. Other common overheads include insurance, rent, and advertising – in other words, the running costs for your business. One important point here: if you run a services business, then all your costs are overheads.

Cash inflow – This one is nice and easy – it’s the money that comes into your business. This will mainly be from sales, but could also include things like tax rebates, business loans, or other outside investment.

Cash outflow – This one is also pretty straightforward – it’s the money that goes out of your business. Most of this money will be either overheads (see above) or costs of sales (things you buy that are directly related to the things you sell).

Gross profit – Your gross profit is the amount of money that you make from sales, minus the costs of sales. In very simple terms, it’s the money you make from selling the things you make (or buy), minus the money you spend making (or buying) the things you sell. If, for example, a business made and sold wooden stools, the gross profit would be the total amount the stools sold for, minus the cost of the wood used to make them.

Net cash inflow – A fancy way of saying that your business is earning more than it’s spending – in other words, it’s making money.

Net cash outflow – A fancy way of saying that your business is spending more than it’s earning – in other words, it’s losing money.

Cashflow forecast divider 1

When should I create a cashflow forecast?

In short, ASAP.

Ok, so you won’t need to do it on day one of your business. You’ll need some time to get everything going, sort contracts with suppliers, make a few sales etc.

But as soon as you’ve got your business going, then you’ll need to start planning ahead. The quicker you create your cashflow forecast, the sooner you’ll have a good idea of the financial future for your business, and the easier it will be to make decisions about expansion plans, finance, and other key areas.

This ties into two key pieces of advice from accounting expert Benedict Gatherer:

  • Don’t be afraid of the cashflow forecast – It is simpler than most accounting! It’s all about when cash actually moves, which is how non-accountants (i.e. normal humans) think about business.
  • Don’t put off your cashflow forecast – Cash is the lifeblood of a business. You might have a business model that makes profit in the very first year, and you might meet every target you set. But if the income is at the end of the year and the spending is at the start, you might run out of cash in the middle, and watch the business fail just because you didn’t realise the cash would run out.

As you can see, there are very good reasons that creating an accurate cashflow forecast should be an early priority for your business.


Who is my cashflow forecast for?

This might seem a weird question – it’s obviously for yourself, right?

Well, not necessarily. You might be creating a cashflow forecast for your bank, or a potential investor that really wants to drill down into the nitty gritty of your business.

As Benedict points out, who your cashflow forecast is for should affect your approach.

If it’s for yourself, then be PESSIMISTIC in all your estimates. It’s always a good idea to have a bit of a buffer in case things go wrong (and something almost always goes wrong).

If it’s for a bank or other outsider, then be OPTIMISTIC in all your estimates. You want to present your business in a flattering light, after all.

However, it’s really important to not go crazy either way – your estimates have to be realistic, or the whole exercise is a waste of time.


Cashflow tools

Using accounting software can make creating a cashflow forecast much easier, and leave you with more time to get on with running your business. Some packages even include cashflow forecasting tools, meaning you can check your future business finances with the click of a button.

To see how this could help your business, check out our list of Startups.co.uk approved accounting software:


 

Cashflow forecast divider 2

Creating a cashflow forecast - Getting started

However, you don’t need fancy software to create a cashflow forecast – a basic spreadsheet program, such as Microsoft Excel or Google Sheets, will work fine when you’re starting out.

Keeping it simple is the key – each column moves forward in time, while each row is a different source of either income (money coming into your business) or expenditure (money going out of your business).

One important note from Benedict – don’t fill your spreadsheet with fancy formulas. As he points out, “every formula you add is a chance to make a mistake you don’t see.” Instead, stick to typing in numbers, and then using a simple SUM formula when you need to calculate a total.

If you’re confused about what your spreadsheet should look like, don’t worry – we’ll be creating an example spreadsheet as we go.

Cashflow forecast divider 3

Creating a cashflow forecast - Working out your sales

We’re going to start creating our cashflow forecast by working out how much money your business makes every month (monthly cash inflow) just from selling your products or services.

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.

Generally speaking, you’ll forecast a year in advance (this is what our example spreadsheet will be based on), but you could also do a longer- or shorter-term forecast. Just remember that the longer you’re looking ahead, the harder it is to make accurate predictions of sales or expenditure.

You should end up with something that looks a bit like our example sales forecast below:

Example sales forecast - How to create a cashflow forecast edit

For the totals, you should use a simple SUM formula. If you don’t know how to do this, see the box below.

SUM formulas

It’s easy to be intimidated by the wide range of complex formulas used in spreadsheet programs like Microsoft Excel.

However, SUM isn’t one of these – in fact, it’s dead simple.

All it means is that you’re adding together whatever is in particular cells (each of the boxes in a spreadsheet is called a cell) to get a total for that month, year, etc.

It’s much quicker than adding together loads of numbers on a calculator, plus it means that if you change a figure, then your total will change automatically.

So, it really is worth getting your head around this.

To get started, go to the cell where you want the total to be and type =SUM. Then you can either type the cells you want to add together in brackets – e.g. (B3:B8) – or just hold down the left mouse button and drag over the cells you want to add together.

You should end up with a formula that looks like this – =SUM(B3:B8).

For more info on this, check out Microsoft’s official SUM formulas guide, which includes a handy video showing SUM formulas in action.

Of course, the numbers you put into your sales forecast are crucial. This brings us nicely to…

Predicting your sales

In your predicted sales table (the one shown above), you should write down how much money you expect to make from selling a particular product or service in each month. This should include VAT if you’re listed for it.

Obviously, this is much easier if you’ve already been doing business for more than one year, as you can simply look at your sales from previous years and get a pretty good idea of your future sales.

If it’s your first year, then try to put yourself in the mind of your customer. Are there particular products or services that are more likely to appeal at certain times of the year, either due to the season/weather or national holidays?

You could also conduct market research to really get an insight into which products appeal to which customers at particular times, or there may be existing data that could help you find this out.

Also make sure you factor in any promotions or marketing efforts you already have planned for future months.

And remember that the overall state of the economy is likely to have a significant impact on your sales, especially if the economic future is uncertain and depends on unknown events.

IMPORTANT – It’s crucial to be realistic about when you will actually receive payment for goods or services sold. For small businesses especially, there is often a significant gap between sending an invoice and being paid.

For example, a September invoice being finally paid in October or even November is sadly a very common experience, so make sure to consider this when putting together your sales forecast. It’s also a good idea to add in a buffer to cover any potential late payments.

After you’ve put down your projected sales, use the SUM formula to work out your total projected sales for each month in the bottom row.

Then, use the SUM formula again to total your projected annual sales for each product or service in the column on the far right.

(The example spreadsheet above shows both of these totals fields, so refer to that if you’re feeling confused)

Cashflow forecast divider 4

Creating a cashflow forecast - Other cash inflows

Of course, sales aren’t the only way that money comes into your business – you’ll also need to record other inflows, such as business loans, grants, outside investment, the sale of assets owned by your business, tax rebates/refunds, and so on.

To give you a good idea of how this might look, we’ve added other cash inflows to our example spreadsheet below:

Example cash inflows forecast - How to create a cashflow forecast

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 startups and small businesses is notoriously unpredictable, so you’re not expected to produce something that’s 100% accurate on day one (even if you run a fortune-telling business!).

Instead, tweak your forecast as the year progresses and you learn more about your business.

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

Cashflow forecast divider 5

Creating a cashflow forecast - Profit and loss

Now you’ve got a reasonable idea of how much cash is coming into your business month by month, you need to do the same thing for the money going out of your business. That way, you can create a realistic profit and loss forecast – in other words, work out whether your business is making money or losing money.

This forecast will help you to estimate how many sales your business needs to make to cover the money you spend on things like materials, utilities, advertising, tax, rent, etc.

Working out your gross profit

At this stage, it’s a good idea to work out your gross profit. Gross profit is the money you make from selling your goods or services. It’s worked out using this simple formula:

Monthly sales income – monthly costs of sales = monthly gross profit

(If you’re short on time, then you don’t absolutely have to work out your gross profit, but keeping an eye on your sales profit will give you a much better idea of when/if you need to boost it by increasing prices, or trying to find a cheaper supplier.)

At this stage, you should already have your monthly sales income, so the next step is to calculate your costs of sales. This is how much it costs to create the things you sell – so think about what you spend on things like materials and manufacturing.

Finally, create a new spreadsheet so you can easily take away your monthly costs of sales from your monthly sales income to get your monthly gross profit.

The exact formatting is up to you, but your gross profit spreadsheet should look something like this:

Example gross profit forecast - How to create a cashflow forecast

Now, everything gets a bit more complicated. Knowing your gross profit is useful, but knowing your net profit is vital. This is the bottom line – how much profit/loss your business is expected to make every month.

To know this, you’re going to need to include your overheads.

Overheads

Overheads are the running costs of your business. What these are will depend on what exactly your business does, but as a starting point, think about the cost of the following overheads:

  • Employee wages, including National Insurance contributions
  • Office rent, plus other office costs like phone systems, laptops, and office furniture
  • Taxes, such as corporation tax or income tax
  • Fees paid to freelancers, accountants, solicitors, designers, marketing firms, or any other professionals used by your business
  • Software packages/subscriptions
  • Web hosting
  • Large one-off payments, such as new pieces of equipment

Trying to remember every overhead for your business is tough, so here’s some advice from accounting expert Benedict Gatherer:

“You will not immediately think of every type of expenditure. Brainstorm at first, then check previous bank statements (if the business is already running), and look at a typical Chart of Accounts in an accounting software program to get a list of common types of money outflows. Don't forget about big, irregular payments, like your initial investment coming in and your taxes going out.”

IMPORTANT – Remember to record your costs in the months that you’ll actually be paying them, rather the months in which you incur them (i.e. the months you actually used that service or product).

Next, you’ll add the cost of your overheads to your gross profit spreadsheet, with each cash outflow (when money comes out of your business) listed on a separate line.

Just like with your sales forecast, make sure you total everything in a row across the bottom and a column at the end.

You should end up with something along these lines:

Example gross profit + overheads forecast - How to create a cashflow forecast

Cashflow forecast divider 6

Creating a cashflow forecast - Putting it all together

It’s been a lot of work, but you’re nearly there now – it’s time to put all your projections together to see how the financial future looks for your business.

Start this final stage by opening a new spreadsheet, then listing all your cash inflows – in other words, all the ways that money comes into your business. This includes sales, grants, business loans, outside investment, tax refunds, and anything else that puts cash into the business.

Next, do the same for all of your projected outflows – all the ways that money goes out of your business. This should be a combination of your costs of sale and overheads.

With all these figures in one place, you can easily work out the total amount your business makes per month, and the total amount your business spends each month.

Subtract the amount you spend each month from the amount you make each month, and you’ll end up with your net profit per month.

This is the true measure of how your business is expected to do over the next 12 months.

Net cash inflow and net cash outflow

We covered these terms in the jargon buster at the start of this guide, but now we get to see how they work in practice.

For each month, you’ll either be expected to:

  • Make more money than you’ve spent – this is a net cash inflow.

OR

  • Spend more money than you’ve made – this is a net cash outflow.

We’ll cover this properly later, but don’t worry if the figures go up and down from month to month – few small businesses have smooth cashflow, so it’s normal to have both net cash inflow and net cash outflow months.

Business bank balance

Working out your projected business bank balance is arguably the most important part of this whole process – it’s the thing that shows the expected future financial health of your business.

To find this, add two rows to the bottom of your spreadsheet.

One should show your business bank balance at the start of each month (your opening cash balance).

The other should show your business bank balance at the end of each month (your closing cash balance).

As you’ve no doubt guessed, these are linked – so your closing bank balance for one month is your opening bank balance for the next month, and so on.

If your projected bank balance is consistently increasing, then obviously it indicates your business should be in good shape going forward. You could then think about expanding, or just enjoy it, knowing that unless something really goes wrong, you should have a secure business.

If your projected bank balance is consistently decreasing, then it’s time to take action.

If you do end up losing money every month, you won’t have a business for long, so think about how you can reduce your expenses, change your prices, or get extra finance.

Here’s a final example of how your cashflow forecast might look:

Example final cashflow forecast - How to create a cashflow forecast

IMPORTANT – Remember that your various spreadsheets need to match each other – so if you change something in one, you’ll need to check how it affects the others.

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 final projected cashflow forecast to avoid confusing yourself later on.

Cashflow forecast divider 7

Understanding your cashflow forecast

Of all the figures in your cashflow forecast, the one you really need to focus on is your projected cash balance.

As accounting expert Benedict Gatherer explains:

“If one month you spend more than you earn, that's not necessarily a problem: maybe you just go from having £50,000 at the start of the month to £40,000 at the end.

“But if the running total you are forecasting ever goes negative, then you are expecting to run out of money and the business will crash. Think of it like the flight path for a plane: if the altitude goes negative, even for one minute, even by 5 feet, that's your flight finished.”

So, if you don’t want your business to nosedive into the ground, then keep a close eye on that cash balance.


How to improve your cashflow forecast

Once you’ve put together your cashflow forecast, the obvious temptation is to file it away and get on with running your business.

And there’s no problem with that – it’s what you love to do, after all.

However, if you do want to improve your cashflow forecast, then think about planning for how things might look if everything goes great, and how things might look if everything goes wrong.

After all, as we said earlier, the world of small business is notoriously unpredictable.

We’ll let Benedict explain:

“If you're feeling strong when you finish your forecast, make two new copies of it, then change the numbers in one to be the best possible future and one to be the worst possible future. Hey, now you're doing modelling! McKinsey would charge half a million for that.

(“Shade the good one green and the bad one red. Seriously, take it from an accountant: looking at lots of similar spreadsheets will blur your vision, and bore you into making silly mistakes. Treat yourself like an idiot who needs everything clean, simple, and colourful.”)

Doing this will give you a much better idea of how your business would be able to cope with problems such as losing a key customer, or a sudden increase in the cost of your supplies.

Cashflow forecast divider 8

Final thoughts

It’s easy to be scared of cashflow forecasting – it’s full of technical terms and big numbers.

However, all it boils down to is working out how much money is likely to come into your business, and how much is likely to be going out of your business – and then working out the difference between the two.

You can then work out how much cash you can expect to have over the next 12 months (or longer if you’re doing a longer-term forecast).

The only reason Excel and formulas get involved is because it makes changing things much easier – you can simply change a few numbers, and the totals magically update.

Getting your head around this will make it much easier to run your business, as you’ll have a reasonably accurate idea of how your cashflow looks in the months ahead.

And if you really don’t have the time to tackle it, then think about investing in accounting software ASAP – many packages have forecasting tools that save you from having to do the number crunching yourself.

However you go about it, understanding your cashflow future is a vital part of running your small business, so it really is something you need to consider.

This guide covers the basics. If you’re struggling with any specific part, then just perform a quick search, and you’ll find loads of specialised insight online.

For more advice on small business finance, check out the Accounting section on startups.co.uk.

Good luck!

Alec Hawley
Alec Hawley

Alec is Startups’ resident expert on politics and finance. He’s provided live updates on the budget, written guides on investing and property development, and demystified topics like corporation tax, accounting software, and invoice discounting. Before joining, he worked in the media for over a decade, conducting media analysis at Kantar Media and YouGov, and writing a wide variety of freelance pieces.

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