Cashflow forecasting for the new year – what every business should know

 

As we transition into a new year, business owners must take the opportunity to assess their businesses financial health and plan for future growth. One essential tool for achieving this is understanding and implementing a cash flow forecast. At Godfrey Mansell & Co Accountants, based in Halesowen, we serve clients in Bromsgrove, Birmingham, Worcestershire, the West Midlands and beyond. We are committed to assisting business owners with their accounting and taxation needs, including cash flow management. In this article, we detail the importance of cash flow forecasting, highlighting the opportunities and risks it presents, and provide guidance on how to create an effective cash flow forecast for both new and existing businesses. 

 

 

A cash flow forecast is a projection that shows the expected movement of money in and out of a business over a specific period, usually on a monthly basis. This forecast distinguishes between cash inflows—money received from sales, loans, or investments—and cash outflows, which include expenses such as wages, rent, and suppliers. By generating a cash flow forecast, businesses can estimate their future cash position, ensuring they have sufficient funds available to meet their obligations. 

 

The importance of cash flow for paying suppliers and creditors, such as HMRC cannot be overstated. It allows a business owner to predict potential shortfalls and prepare for them in advance, thereby alleviating the stress associated with last-minute cash shortages. Moreover, effective cash flow management is vital for credit control, helping you maintain a positive cash flow and safeguarding your business against financial difficulties. 

 

 

Performing cash flow forecasting opens the door to numerous opportunities. It allows businesses to: 

 

1. Identify Funding Needs - By understanding when cash will be available, business owners can secure financing when they need it, ensuring business operations remain uninterrupted. 

2. Plan for Growth - A well-drafted cash flow forecast can help identify opportunities for business investment or expansion by showing when the company can afford to take on new projects. 

3. Control Credit - Monitoring cash flow ensures that businesses can implement appropriate credit control measures, thus reducing the risk of bad debts and ensuring a steady inflow of cash. 

 

On the other hand, there are risks that your cash flow forecast can expose. Notably: 

 

1. Financial Issues - If cash inflows fall short of projections, the business may encounter difficulties in meeting financial obligations, potentially leading to insolvency. 

2. Operational Limitations - A lack of accurate cash flow monitoring might result in unexpected expenses that the business is ill-equipped to handle, stunting growth and operational capability. 

3. Misalignment of Strategy - Discrepancies between forecasted figures and actual performance can mislead management, potentially resulting in misguided strategic decisions. 

 

 

Creating an effective cash flow forecast requires careful planning and consideration. Below are some simple steps tailored for both new and existing businesses that outline how to put together a forecast: 

 

 

1. Estimate Initial Cash Balance - Start with the amount of money you have available to fund business operations at the outset. 

2. Forecast Sales Revenue - Use market research and competitive analysis to predict sales for the first twelve months. Consider seasonality and economic factors. 

3. Identify Fixed and Variable Expenses - List all expected costs, including rent, salaries, utilities, and other operational expenses, distinguishing between fixed and variable costs. 

4. Project Cash Inflows and Outflows - Detail when you expect to receive payment for sales and when expenses will be due. This will help in understanding the timing of cash movement. 

 

 

1. Review Historical Data - Analyse past cash flow statements and financial records to guide projections. Identify trends and seasonal patterns that impact cash movement. 

2. Adjust for Future Changes - Take into account any foreseeable changes, such as new clients, changes in supplier pricing, or operational adjustments that may impact cash flow. 

3. Create a Monthly Cash Flow Statement - Break down cash inflows from sales and other sources against the scheduled expenses and cash outflows to illustrate the net cash movement each month. 

4. Monitor and Update Regularly - Consistently compare actual figures to those forecasted. This careful monitoring is vital for identifying discrepancies and understanding their causes, enabling timely adjustments to your business strategy.