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How to do a cash flow forecast

Most cash flow forecasts are 12-months but you can go for 3-5 years, especially if you are producing the figures for the bank.

You start a cash flow forecast with a sales forecast – this is a month by month estimate of sales receipts.

To create a sales forecast you may want to think about break down your sales into the key services and/or products as well as the source of the sale; marketing tactics. And, you need to allow for payment days.

Here are some questions to ask, starting with look at your last year’s sales:

  • Are there any trends in terms of services or products declining or increasing?
  • Are there any seasonal variations?
  • Is one type of marketing better than the others?
  • Can you improve certain marketing tactics

You can then think about:

  • Could you launch a new product, service or option?
  • Could you launch into new target markets?
  • What to focus on because it’s more profitable or because you enjoy it more?
  • If you are aiming to make more sales in a particular area, build that into your forecast.

Next you need to think about your costs and expenses.

If you sell goods you will have costs of sales such as materials, this could be a percentage of sales based on your profit margins.

You also need to consider your people costs; this can be employees or sub-contractors.

To produce your sales forecast you needed to think about your marketing costs so included these. And, most businesses rely on computers and software so include these subscriptions.

Then there are the normal overhead costs including:

  • Premises
  • Professional fees
  • Office costs e.g. telephone
  • Travelling

A cash flow forecast must also take account of taxes. This includes:

  • PAYE
  • VAT
  • Tax

If you trade as a limited company you need to ensure you leave enough cash in the business to pay the tax. But, this will be 9 months after the year end so you may need to know last year’s tax in the cashflow.

If you are a sole trader you have the option to take less out of the business and show your business paying your tax bill. Or, you can take out as much as you can and keep a personal savings account to pay the tax.

If you’d like to start cash flow forecasting get in touch.

Image from Flickr by Philip Taylor.

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