Managing your cash flow properly is one of the most important actions you can take as a business owner to survive an economic downturn.
The chances are that your customers/clients will be slower in paying their invoices because their customers/clients are not paying them on time.
You must, therefore, ensure you have the cash reserves available to meet your overheads and are not reliant on invoice payments to pay your bills. One way you can do this is to do a cash flow forecast.
What is a cash flow forecast?
Cash flow refers to the money moving in and out of your business over time. Forecasting your cash flow predicts the future amount of cash coming and going out of your business, usually over 12 months.
Why is useful to construct a cash flow forecast?
Not only will doing a cash flow forecast help you ensure you have enough cash to cover your business expenses, but it can also allow you to plan for the future.
For example, a cash flow forecast shows an estimation of:
- When you can afford to take on new employees
- The right time to invest in a new product or market
- How much can be paid out to shareholders in dividends
How do I calculate a cash flow forecast?
If you’re ready to start creating a cash flow forecast for your business, start gathering some historical data.
You need to get reports detailing your business’s income and expenses from your accountant, books, or accounting software. Depending on the period of time you want to predict, you might need to gather additional information.
Following the below steps may be useful:
- Find your business’s cash for the beginning of the period – cash at Beginning of Period = Previous Period’s Income – Previous Period’s Expenses.
- Estimate incoming cash for the next period – Incoming cash includes things like revenue, sales made on credit, loans, and other movements in your business bank account.
- Estimate expenses for the next period – Think about all the expenses you will pay next period.
- Subtract estimated expenses from income – To calculate your business’s cash flow, subtract your estimated expenses from your estimated income. Cash Flow = Estimated Income – Estimated Expenses
- After you calculate cash flow, you need to add it to your opening balance – This will also give you your closing cash balance.
A cash flow forecast requires the following elements:
- Revenue and total revenue (cash inflows)
- Expenses and total expenses (cash outflows)
- Net-cash flow = cash inflows – cash outflows
- Opening balance – on the first day of the month
- Closing balance - the closing balance is the amount of money the business has on the last day of the month: closing balance = net cash flow + opening balance
The advantages of cash flow forecasting
In addition to ensuring that a business avoids cash shortages, cash flow forecasting helps businesses thrive in other ways:
- Helping businesses get out of debt faster (debt repayments are often large cash outflows that need to be planned for)
- Ensuring businesses adhere to any financial restrictions they may be accountable for
- Predict the business growth and improve your cash flow
Get legal assistance from LawBite
A cash flow forecast will ensure you understand the amount of money coming in and out of your business. This can help you plan for unexpected bills, growth opportunities, and situations where customers are late in paying their invoices.
LawBite has helped thousands of businesses achieve their commercial ambitions. To find out how we can help you, book a free 15-minute consultation or call us on 020 3808 8314.
