One of the
things that is even more important to a business than profit is cash. Even a
business that is making a profit can potentially fail to survive if the cash
position is not good.
every small business will at some time find itself suffering from cash flow
problems it is important to try and plan ahead and figure out when a cash flow
problem could potentially arise.
This is done
via a Cash Flow Forecast.
businesses will have a Cash Flow Forecast that looks ahead for a minimum of 3
months and often for a whole 12 months. These Forecasts are generally “rolling”
forecasts which means that each month you drop your actual month and add the
next month in sequence doing any adjustments to the months already forecast as
difference between a Profit Forecast and a Cash Flow Forecast is that a Cash
Flow Forecast specifically looks at the cash position of a business. In other
words it doesn’t take into account those costs, such as depreciation, which
have no direct impact on the cash position.
businesses benefit from having a Cash Flow Forecast, and even more so if their
sales are seasonal. Many businesses can be quiet just after Christmas or during
a summer holiday period. By planning for these downtimes in cash flow, and adjusting
purchasing as necessary it will be much easier to keep your business afloat.
How to create a Cash Flow Forecast
Forecasts can be created very easily using spreadsheet programs such as Excel.
Decide whether you want it for three months or for a whole year, set up the
monthly columns as appropriate and then look at your bank account to get your
- The first thing that you will need to
do is work out what you expect your sales income to be. The starting point is
Sales Invoices that you have already raised and orders that you have already
received. You then need to calculate your expected sales for the following months.
If you have been in business for a while you can use previous year’s trends for
your estimates otherwise look to any budget or Sales forecast that you have put
together. You can also do some market research to come up with some reasonable
- If there is any other sort of income
expected, bank interest, tax refunds etc. then these should be estimated next.
- The next thing to look at is “known”
expenditure for the next year. These are those costs that are pretty much fixed
and which you can be certain of, both re amounts and re timing. These costs
would include salaries, tax payments, loan repayments, rent, mortgages, lease
- Finally all other expenses need to be
estimated. For the immediate month you will probably already have purchase
invoices or will already have made orders of goods and/or services. For future
months estimates will need to be made. As with the sales, budgets and/or
previous trends can be used to try and determine these figures. Any planned
items of expenditure such as fixed assets should also be included.
Once all the
incomes and expenditures have been estimated the figures should be entered into
the forecast. The incomes for each month should be added to the cash position
and the expenses deducted from it.
Once all the
data has been entered you should be able to clearly see if there are any months
when the cash position looks like it is likely to go into the negative. If so
then you can determine what you need to do about it. You may need to delay a
planned purchase or alternatively try and source some finance to get you
Cash Flow Forecast Template Available
me with your email address if you would like me to forward you a template to
use for your Cash Flow Forecasts.
We all know
how important it is for businesses to have a budget but it can be just as
important to have a budget to manage your personal finances.
So many people
get into debt because they don’t manage their personal finances properly or become
stuck when they get an unexpected large bill and have difficulty paying it. By
having a personal budget it is easier to ensure that you are prepared for the
unexpected and that you have money put aside ready for those large bills.
goal for a personal budget is to minimise expenses and maximise savings. By
cutting down on unnecessary spending and increasing your monthly savings you
can put that extra saving toward long term financial goals. A budget also
allows you to properly plan for and put money aside for periodic bills such as
quarterly rates bills, or annual insurance bills.
people who are in paid employment it is easy to know what your monthly income
is. However for those who are self-employed or who run their own business determining
income may not be quite so straight forward. In this instance a best estimate
should be used, if possible aligning it with the business budget.
certain expenditures which will be the same or very similar each month. These
therefore relatively easy to budget for.
category of expenses are those which can vary much more, but by the same token
are also those over which you have more control in terms of the amount you
spend. Some are still necessary costs but others are not and can therefore be
dropped if the budget does not allow for them. These types of costs include:
- Eating Out
- Car / Travel
getting a realistic picture of how much is currently spent on each of these
costs and by then taking control of this expenditure your budget will start to
look much healthier.
Tip! Put money into a different bank account each month for those bills
that are quarterly or annual so that you have the money put aside ready for
when the bills come in.
Help with Budgeting
There are many
different websites that provide free templates and guidance on creating
personal budgets thus making it a relatively easy exercise to perform as long
as you have the discipline required. A few samples of these websites are as
Once you have
plans and goals for your business the next most logical thing to put in place
is budgets. Budgets can be important tools which unfortunately too many
businesses don’t make proper use of.
businesses will take their “actual” sales and costs from the previous year and
then use them as their “budgeted” sales and costs for the next year. While this
may be a quick and easy way to put a budget together it means that the budget
isn’t being used to its full extent – as a control tool.
Budgets can be
used when helping to forecast sales, but more importantly they should be used
to help control costs.
- Are all your costs necessary?
- Are you spending money on things that you don’t really
- Are there ways to reduce some of your costs?
- Could you achieve better savings by timing your
purchases or by buying in bulk?
These are all
questions that you should be asking when putting together a budget.
One example that I saw at a previous company was the buying of
stationery. All stationery was purchased online and then delivered. The
delivery cost was free if the order was over a certain amount. Originally the
stationery was purchased as and when required and delivery costs were
frequently paid. However, this was changed to a once a month order, with
requirements being added to a list throughout the month. This immediately
eradicated the delivery costs while at the same time making staff more careful
with their stationery usage thus reducing the cost of stationery consumables
too.Zero Based Budgeting
is a great way to set up a budget that is to be used
as a proper control tool, particularly for new businesses or businesses that
need to introduce better control of their costs. What zero based budgeting
does, as the name implies, is that it starts with no costs in the budget at
all. You then justify every cost that gets added to the budget:
- Do I need to spend this?
- What is the best price I can get this for?
- Is there a way to reduce this?
these questions and justifying every item of expenditure the budget is being
used as a control tool making you aware of all your costs and the need for
putting a budget together is just half of the exercise when it comes to properly
using a budget as a control tool. The other half of the exercise is to compare
and analyse the actual costs against the budgeted costs. This will be covered
in more depth at a later time.