Cash flow forecasts sound a little dull but they are essential when it comes to understanding the health of your business.

And as the coronavirus crisis seems set to continue creating uncertainty for companies, sitting down to produce a cash flow forecast is something we’d recommend.

From the moment that Boris Johnson announced the lockdown, our advice to clients was to produce a cash flow forecast. But how do you start?

What is a cash flow forecast?

It sounds like something that is only for the boardrooms of large PLCs, but financial forecasting is probably even more essential for small and medium-sized businesses.

Smaller businesses often don’t have as much cash available to draw on in an emergency. And the coronavirus pandemic is a massive emergency that has highlighted the need for forecasting.

If you know what cash is flowing in and out of your business, you are better placed to make important decisions.

Basically, that’s what a cash flow forecast is: it tells you what money you owe, what is owed to you and what you have in your bank account. And this will tell you how well you can survive.

It will help you:

  • Plan how much you expect to make in sales
  • How much you expect to spend on costs
  • Understand when cash will appear in your bank account and when it will leave

Armed with this knowledge you will be able to work out if you are likely to run out of cash and whether you can afford to borrow to get you through the current situation. The best thing is to use a template.

What you need to do

Step 1: First of all, decide how far you want to plan for.

Although these are unprecedented times, the basic principles remain… plan as far ahead as you can. There is clearly a lot of uncertainty but we’d advise planning for at least the next 3 months.

You can always update your plan and we would recommend that you revisit it as soon as the lockdown ends.

Step 2: List all your income

For each week, list all the cash you’ve got coming in. Normally we’d say each month, but if you are facing issues due to the crisis, then weekly is enough.

Start with your sales, especially for those you are owed for. You may be able to predict them from a previous month or years’ figures. Put the figures in for when you expect those invoices or payments to clear in your bank account and not before.

Remember non-sales income too. For example:

  • Tax refunds
  • Grants, especially those the government have announced recently
  • Investment from shareholders or owners
  • Bank interest, however little that may be at present!

Once you have those figures you will reach your net income.

Step 3: List your outgoings

Now you know what money is coming in, you need to work out what is going out. Make a list of all the money you will be spending, such as:

  • Rent
  • Salaries
  • Assets
  • Raw materials
  • Bank loans, fees and charges
  • Tax bills, like VAT and PAYE
  • Advertising or marketing
  • Subscriptions, license fees and professional fees
  • IT and software
  • Telephone, broadband and utility costs

When you add all those together you will then know what your net outgoings are.

Step 4: Work out your running cash flow

For each week, take away your net outings from your net income. That figure will either be positive or negative.

If there’s more going out then coming in, then you may have problems. This is more likely during such a difficult time, but if you can show lenders that you would normally be profitable you’re more likely to get help.

Running at a loss too regularly means your business will be seen as too much of a risk so you may find it difficult to secure loans to keep you afloat.

The government has made it clear that the Business Interruption Loan Scheme will only be available to those businesses that were healthy before the pandemic.

You may also want to include the cash that is actually in your bank in your calculations so that you can see exactly what your cash position is each week and can make decisions based on this. You will also be able to see in advance when your cash is likely to run low.

We always recommend having at least a 3-month cash buffer to act as a safety net to tide you over in circumstances just like these.

If you want more help with your cash flow forecast, do not hesitate to contact us.

Guidon Group Ltd

t: 01642 927265                                  e: info@guidongroup.co.uk

Gloucester House, 72 Church Road
Stockton-on-Tees. TS18 1TW

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