Forecast monthly cash flow

Monthly forecasts of cash flow are fundamental to your business. Depending on your type of business, you are unlikely to be able to raise investment or develop a good relationship with your bank without an accurate assessment.

It is generally recommended that all new businesses should prepare a monthly cash flow forecast for the first year and an annual forecast for the first five years of business operations.

There are other benefits of forecasting your monthly cash flow:

• An accurate monthly cash flow forecast will allow you to get a clear idea of how your business is doing - and how it is likely to perform in the future
• You will be able to specify times when your business may need additional funding, such as when cash outflow exceeds inflow
• Inconsistencies in performance can be identified, predicted and remedied
• Major new investments can be bedded in and accurately assessed

Construct a cash flow statement

You will need to gather bank statements including all cash and deposit accounts and any cash at hand. You can then be clear on your ’starting position’.

ADD: Cash in

In the appropriate month enter:

• Sales made, for which you’re awaiting payment - include the VAT amount
• Other incoming amounts (eg rent payments etc)
• Forecast the sales you will make in future months. Note the cash amount you expect to receive.

LESS: Cash out

You will be aware of the routine expenses from your budget. Consider the cash elements of payments rather than the charge against profits and also the areas in which there may be timing differences (ie a difference between the time a bill is due and the time it’s actually paid), include rent, payroll, VAT and creditor payments.

Calculate the cashflow

You now have the information to complete the calculations. Start with the opening balance, add the incoming cash and subtract the outgoing cash. The balance at the end of the month becomes the opening balance for the following month.

Accountancy software

If you want to use software to calculate your monthly forecasts, make sure you purchase a system that is simple to use, compatible with your existing systems and secure.

Using software will take much of the tedium out of forecasting, but it doesn’t relieve you of the need to gather information. All computer packages depend on the quality of information inputted, so false assumptions and wrong figures have got to be guarded against. These errors can be easy to make - and difficult to identify. Accounting Web has a directory of the various forms of accounting packages currently available.

Also, remember that whether you are using a computer or performing the assessment manually you are considering cash transactions only - you are not looking at promissory notes, invoices despatched and received etc.

Action Checklist

• Once you have made the decision to draw up monthly forecasts, make sure you update them on a regular basis
• Keep the information confidential; this sort of material can be very commercially sensitive, so be careful who you give access to
• Keep a clear record of your forecasts and judge them against actual performance; note any factors you didn’t allow for in your forecast

Use your forecasts to extend your business overdraft or apply for a loan