Managing Your Cashflow

2. Cashflow Forecasting

The more warning you have of cashflow peaks and troughs, the more time you have to deal with them.

2.1 Accounting software makes it easier to prepare budgets and revenue and expenditure forecasts for the months and years ahead. (See Using accounting software.)

• You can quickly update your projections and make 'what if' calculations. For example, what if sales are 20 per cent below forecast for six months in a row?
• For maximum flexibility and ease of use, you can use special forecasting software, such as Sage's Winforecast.
• You could use graphics to make it easy to detect patterns and step changes.

2.2 Prepare budgets showing the level of sales and profits you expect to achieve, and the costs involved in doing so.

• Estimate the sales and margins, based on past experience. Don't be too optimistic in your forecasts, or you risk losing credibility. Overheads such as rent can be accurately predicted.

2.3 Prepare monthly (or weekly) cashflow forecasts, looking ahead one year, updated monthly.

These forecasts show what cash you expect to come in, and when (if at all) you expect to run into problems.

• Identify the major outgoings, especially those on fixed dates, such as the monthly payroll.Make sure you will have sufficient cash on the day, to cover each payment.
• The key is to be realistic. For your regular sales, use the established figures for sales volumes, debtor periods and bad debts. For any new products or customers, be pessimistic - expect problems and delays, and do not book a sale until the customer has paid the invoice.
• Be aware that monthly forecasts do not take into account weekly fluctuations.

2.4 Include key indicators that give a picture of the health (and prospects) of your business. (See Key performance indicators.)

• For example, the volume and status of sales leads and the volume of orders.

2.5 Include the budgets and forecasts in the management accounts which you regularly send to the bank.

• A bank which trusts your forecasts will be more prepared to extend your borrowing facility when you need extra finance. Consider meeting with your bank on a regular basis, so they are aware of your financial situation. (See Managing your creditors.)