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One can never under-estimate the importance of cash-flow to a business. It is the lifeblood of any commercial organisation. Even for successful businesses, good financial control is absolutely essential for converting profits into the cash needed to pay staff and creditors without the need for expensive overdrafts and loans. A Cash-Flow Forecast is just one of many tools that businesses use to control their finances but for most of them it is probably the most important.

Why does a business need a Cash Flow Forecast? The primary reason is to estimate how much money it will have available at any one time to meet its obligations. Armed with this information, it is possible to plan a financial strategy with the aim of ensuring that the business does not run out of cash unexpectedly. It will also enable you to forecast unavoidable cash shortfalls well in advance and take remedial action before the position becomes critical. For example, if you need to negotiate a bank loan or a cash injection from your shareholders, you want to be able to do this at least a couple of months ahead while you are still in funds, not a week before the VAT bill is due when you have just run out of money. The former situation will impress your bank manager a bit more than the latter!

The format of a Cash Flow Forecast will depend upon the needs of the business. At one extreme, a cash-rich business with predictable outlays will need less detailed but more long-term forecasts to ensure that its cash resources are being put to good use and earning the maximum rate of return. If the business has an active investment strategy, it will require more frequent cash flow reports in order to decide how much cash to convert into equities and loan stock and when to redeem them.

At the other end of the scale are the majority of small businesses for whom managing cash-flow can be a constant battle. Many such firms operate on a financial knife edge. Losing a major customer can make all the difference between turning a profit and trading at a loss. It is vital to know as soon as possible if such an outcome is likely. The sooner an imminent cash flow problem is spotted, the sooner you will be able to take steps to deal with it, perhaps forestalling worse action later.

The loss of a major customer would at least be known as soon as it happens. More insidious is the situation where a large customer simply stops paying or takes much longer to pay than it did before. This may not be immediately apparent unless you keep well on top of your credit control. It is vital to know when customer payments are due and, if they are late, the reason for non-payment. If you are lucky, it will simply be due to someone being away on holiday or a query of some kind. If you are unlucky, it will be because your customer is having cash flow problems of their own, in which case you will need to decide how to deal with the situation. If you are very unlucky, it will be because they have already gone bust, perhaps owing you thousands of pounds.

For a small business operating on tight margins, Cash Flow Forecasts should be prepared at least monthly and constantly updated with all the latest information. There should be one section for cash inflows and another for cash outflows, with the bank balance at the beginning and end of each month shown clearly. Each section should be analysed in enough detail for management to see exactly what the major cash flows are. For example, large customers and suppliers should go on individual lines, as should tax payments and payroll. Loan repayments and other irregular or one-off items should also be entered separately. Sometimes it may be appropriate to have separate itemised schedules for customers and suppliers so that the main cash flow report is clearer and easier to follow.

In some cases, it may be better to prepare Cash Flow Forecasts on a weekly (or even daily) basis. This will be appropriate where you already have a bank overdraft and it is vital to ensure that it is not breached otherwise you will incur steep bank charges or even lose your overdraft facility. It is equally necessary to monitor cash flow more closely when your bank balance is low and you wish to avoid unauthorised overdrafts. However, such detailed forecasts may only be necessary on a temporary basis and may take the form of ad-hoc reports.

Forecasting cash flows will often require a certain amount of crystal ball gazing on the income side as it is not always apparent how much money a business will even earn let alone when it will be paid. This will often be the case when a business sells to the general public and does not have many regular customers. Where a business does have regular customers and fees are known in advance, forecasting cash flow should be much easier, especially if the customers pay by standing order or direct debit.

Cash outflows should be much easier to forecast for most businesses as they would not be incurred unless they had been authorised in the first place. For example, payroll and regular outgoings such as rent and rates should be known with some certainty as they are usually paid on the same date each month or quarter. The same goes for VAT and PAYE, whilst corporation tax is an annual payment for most small businesses where the amount and due date will be known well in advance, depending on how quickly you can do your annual accounts.

Payments owing to suppliers will be known from your Purchase Ledger records and you will usually have a bit more control over these, within certain limits. Indeed, one of the most common reasons for preparing a Cash Flow Forecast is to decide on the timing of supplier payments. However, you must know how old your liabilities are and when they are due if you want to avoid upsetting your suppliers, otherwise you may well find that your account has been put on hold and payment is demanded in advance. For this reason, it is advisable to review your trade creditors at least once a week. Credit terms will vary between different suppliers but most will give about 30 days and it may be possible to take longer depending on your relationship with them and how good they are at chasing overdue accounts.

Where a business sells goods and has to pay for stock or raw materials, cash outflows will be more difficult to predict as they will depend on the value of sales. You will probably base your cash outflow figures for these costs on the related sales figures, but if you assume a standard mark-up for your sales, you will need to monitor this figure carefully against actual margins achieved, especially if the market is very competitive and prices are coming down. You will also need to forecast the timing of these cash outflows very carefully as there could be a long gap between buying stock or raw materials and eventually realising a profit on them.

To sum up, a good Cash Flow Forecast will give you the flexibility and confidence to manage your finances advantageously as opposed to your finances managing you!

Acumen Accounting
2 Purley Bury Avenue, Purley Oaks, Surrey CR8 1JB
Tel: 020 3669 5270 Mobile: 07813 582890 E-mail:

For information of users: Although every care has been taken in compiling this material, it only provides an overview and does not take the place of an individual consultation. We strongly advise all users to consult the detailed legislation or seek professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or this firm.

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