Cashflow management: the basics

The principles of cashflow forecasting

Cashflow forecasting enables you to predict peaks and troughs in your cash balance. It helps you to plan borrowing and tells you how much surplus cash you're likely to have at a given time. Many banks require forecasts before considering a loan.

Elements of a cashflow forecast

The cashflow forecast identifies the sources and amounts of cash coming into your business and the destinations and amounts of cash going out over a given period. There are normally two columns listing forecast and actual amounts respectively.

The forecast is usually done for a year or quarter in advance and divided into weeks or months. In extremely difficult cashflow situations a daily cashflow forecast might be helpful. It is best to pick periods during which most of your fixed costs - such as salaries - go out. The forecast lists:

• receipts
• payments
• excess of receipts over payments - with negative figures shown in brackets
• opening bank balance
• closing bank balance

It is important to base initial sales forecasts on realistic estimates - see our guide on how to forecast and plan your sales. If you have an established business, an acceptable method is to combine sales revenues for the same period 12 months earlier with predicted growth.

Download our sample cashflow projection spreadsheet (XLS, 82K) - Opens in a new window.

Note that all forecast figures must relate to sums that are due to be collected and paid out, not invoices actually sent and received. The forecast is a live entity. It will need adjusting in line with long-term changes to actual performance or market trends.

Accounting software

Accounting software will help you prepare your cashflow forecast, allowing you to update your projections if there's a change in market trends or your business fortunes. Planning for seasonal peaks and troughs is simplified and you can also make 'what if' calculations. Most banks require profit and balance sheet forecasts as well as cashflow. Many accounting packages will assist with preparing these documents. See our guide on accounting software.

Subjects covered in this guide

• Introduction
• What is cash?
• Cash inflows and cash outflows
• The principles of cashflow forecasting
• Manage income and expenditure
• Cashflow problems and how to avoid them
• Using your cashflow forecast as a business tool
• Cash management in action
• Refinements to a simple cashflow forecast
• Here's how I manage my cashflow

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