Cash flow forecast

Setting up in business: Cash flow forecast

Setting up in business: four simple steps to create a cash flow forecast


However you’re planning to fund your business, alongside your business plan the other key document you’ll need to have is a cash flow forecast or projection, usually covering a minimum of one year’s trading.

Cash flow is vital: even profitable businesses have been known to fail due to cash not being available when they need it. Producing a cash flow forecast tells you what is going out (expenditure), what is coming in (income) and the balance between the two.


When you are in the process of setting up in business, producing a cash flow forecast can feel as if you’re being asked to stray into the realms of fiction: after all, until you’ve started operating how can you know what’s going to happen? The answer is you can’t, which is why a cash flow projection should be a document that you regularly update with real figures, especially when you plan to make changes to your business.

The point about a cash flow forecast is that analysing it alerts you to potential danger points, which enables you to take action. Regular readers of Vitality will know we’re fans of spreadsheets, but it’s also possible to get specialist accounting software that includes a cash flow projector. There are also free templates available online that will do many of the calculations for you.


We've put together four simple steps to follow to create a cash flow projection for your business. 


Positive cash flow: when you have more income than expenditure for a particular month.
Negative cash flow: when there is more expenditure than income during a month. It is not uncommon for businesses to have some months with negative cash flow


Step one

Create an opening balance.

This is the money you are putting into the business (your own cash or loans) minus the money you need to spend in advance on setting up your business.


Step two

Record your outgoings for each month.

There are two types:

Fixed costs - these remain the same during your forecast period, such as premises costs, business rates, insurance, major equipment costs and loan repayments
Variable costs - these will fluctuate depending on the time of year and your needs, these include supplies for individual treatments and marketing.


Don’t forget to include your wages and those of anyone you employ. Depending on how you choose to operate, these could be fixed but if you operate a bonus scheme there could be some fluctuation. You will also need to pay National Insurance contributions and tax.


Step three

Record what you think your incomings will be for each month.

It is difficult when you haven’t been trading but your existing experience as an employee – or even how easy it is to get booked in as a client – should tell you which times of the year are busy and will bring most revenue. You can also factor in marketing plans and what sales you think they will generate.

Although therapists are like retailers in that payment is made immediately, if you win a contract to provide therapies or treatments to another business you might have to invoice for the work, which usually means waiting for payment. Payment terms vary, but are usually around 30 days and can be up to 90 days. You need to factor this delay into your cash flow forecast.

While it’s good to be optimistic when setting up in business, it’s important not to over-estimate the sales you will achieve. It’s far better to be able to plan for negative cash flow and be surprised when it’s positive than to suddenly find yourself with a shortage of funds.


Step four

Look at the balance for each month.

Don’t panic if there are some months where there is negative cash flow – most businesses have them. Analyse when these months happen: if a negative month follows a positive month, will you have enough reserves to ride out the negative month? Would altering your behaviour produce more positive cash flow?

For instance, would ordering little and often from suppliers be better than placing a single large order? You might find yourself paying more in delivery costs but is that a price worth paying to protect your cash flow? Could you negotiate different terms with your suppliers? Loan providers are often happy to move the payment date to suit your cash flow. If a cash flow problem happens after the first six months, suppliers may be willing to negotiate credit if you’ve proved yourself to be a good payer. If you’re in the position of having to invoice, don’t put off chasing any late payments.

Would launching your business a month later help you build more reserves for future negative months? Once you start trading, add in a column of real figures next to your projected figures so you can see how accurate your guesswork has been, and how the reality of trading affects your cash flow.


Original article featured in Vitality magazine January/February 2017 issue. Read the full issue online here

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