Small Business Cash Flow Forecasting: What, Why & How

Managing a business comes with a number of financial responsibilities, including the important matter of cash flow forecasting.

Designed to provide a quick summary of a business’s financial health and viability by detailing the projected cash flowing in and out of your business, cash flow forecasting is an important part of successfully running a business.

But if you’re not up to speed with cash flow forecasting, or even entirely sure what it entails, there’s no need to panic.

In this guide, we'll be talking you through the what, why and how of cash flow forecasting. With our help, you can get all of your business’s ducks in a row, financially speaking, for a more accurate view of your income and expenditure.

What is cash flow forecasting?

In order to understand cash flow forecasting, you first need to understand what cash flow is.

In short, cash flow is the total amount of all money coming into a business (income), offset against money going out (outgoing expenditures). Money coming in covers everything from sales revenue to shareholder investments, tax rebates and grants. Money going out includes rent, salaries, loan payments, utility bills, raw materials and any other business expenditures.

In order for a business to successfully operate and be profitable, the former (income) needs to be greater than the latter (outgoings) - with the business bringing in more money than it spends.

When it comes to cash flow forecasting, the idea is that business owners can predict future income and outgoings based on previous data. As a result, the forecast will quickly highlight any shortfalls on income in advance, affording business owners time to arrange alternative cash flow solutions, such as an extended overdraft agreement or new investment.

While it’s normal for small businesses to have some negative net income from time to time, continued negative cash flow will, naturally, have a detrimental impact on the business.

Typically, cash flow forecasts or projections will show a month-by-month view of finances across a year - but for small businesses, this data can be projected over a shorter time period.

Cash flow forecasting is usually recorded in a spreadsheet format, although some cloud accounting software solutions provide integrated cash flow forecast reporting.

Why is cash flow reporting necessary?

Cash flow reporting is essential for two reasons.

Firstly, it helps you to quickly and accurately view the financial health of your business which allows you to plan for future growth.

For instance, if you need to pay out for some new equipment or move premises, your cash flow forecast can give you a clearer picture of if and when you’ll be able to afford these upgrades.

Secondly, if you want to apply for any business loans or attract new investors, this forecasting will prove vital to your success.

Most importantly, this document will provide an idea of your projected growth, but simply having a cash flow forecast can demonstrate that you’re operating a well-run business - something every investor or bank wants to see.

How to calculate your cash flow forecast

Calculating your cash flow projections can seem like a daunting task, but rest assured this is something you can do yourself with relative ease.

In a nutshell, your cash flow forecast outlines two fundamentals of your business: incoming revenue and outgoing revenue.

These elements are typically split into two categories. These can be further split into estimated and actual, which can be updated at the end of the month to determine how accurate your estimates were.

Depending on how your business operates, there are two ways of recording incoming and outgoing revenue. There’s cash accounting (which inputs money as you get it and as you spend it) and accrual accounting (which records income and expenses as they incur, although they may not be paid for right away).

When it comes to cash flow forecasting, you should always use cash accounting - only inputting income and expenditure that will be received and spent that month.

In terms of where to start, here’s a step-by-step guide to calculating your cash flow forecasting:

1. Define your forecast period: most commonly, businesses record monthly forecasts across a full financial year - but this window may be smaller depending on the size or nature of your business.
2. Calculate your opening balance: if you’re new to cash flow forecasting, you need to work out your opening balance to use as a starting point. To do this, simply take your bank balance from the start of the month you’re currently in. Once the month is complete, you’ll input income and expenses to calculate the next month’s balance. From then on, the previous month’s closing balance will be the benchmark for the next month.
3. List your income: in one column, outline all revenue coming into the business per week or month - including sales, grants and tax rebates. If you have any regular payments for ongoing contracts or subscriptions, these can be indicated for the entire term of the contract.
4. List your outgoings: in another column, list all business expenditures - such as salaries, investor dividends, utility bills, rent, business supplies and raw materials, advertising, business loans and more.
5. Calculate your running cash flow: total up both the income and expenditure columns to calculate your net income and net outgoings. For each period - week, month, quarter - deduct expenditure from income to work out your running cash flow. This should hopefully show that you’re spending less money than you’re earning.
6. Keep your forecasts up to date: your cash flow forecast is only valuable if you keep it up to date, just like you would your balance sheet and income statement. Your cash flow forecast should reflect any income or expenditure changes in order for it to return accurate forecasts. For instance, if a big order is cancelled, this needs to be shown in the forecast sheet as soon as possible so that you can counteract the lost income.

Getting your head around small business accounting matters such as cash flow forecasting can be a steep learning curve. But this guide should give you the right know-how to help you get on top of your business’s cash flow forecasts for accurate financial reporting and predictions.

Of course, if you’re not one for numbers, or you simply don’t have the time to dedicate to cash flow forecasting, it could be beneficial to speak to one of our accountancy experts. With our experience and expertise, we can help you set up and manage your finances to help your business thrive.

Get in touch with Harlands today to discuss your needs in more depth.