Cash Flow is King! Guide to setting up a Cash Flow Forecast

Right now – Here’s my first post on Finance. To be honest with you, it probably should have been earlier because of the importance of it, but hey lets face it, finance isn’t the easiest/most enjoyable subject to blog about. πŸ™‚

OK, in any business there are lots of different things you need to consider about your finances – most importantly your ‘cash flow’, ‘profit and loss’ and ‘balance sheets’. In my opinion, especially as a fledgling business there is no more important metric than cash flow. Why I hear you ask? Quite simply because if your business has no cash flow, then you cannot survive for very long. As the recession looms on its very difficult to loan money from traditional places like the Banks, so cash really is vital to how long you can stick around for. You could have the best product, with the best profit margins, but if you are not getting the money in then you may as well forget it. I think I’ll deal with getting money in on a separate post as that’s pretty important too – lets save that one for another day.

OK so cash flow is, as you would expect, the measure of cash coming into and out of your business. It will help you forecast your performance and assist in making important decisions over whether you need to or even can invest in certain things to push your business forward. Any business owner without a healthy understanding of cash flow or how to keep track of your own is, in my opinion destined for problems.

So lets break down how to measure your cash flow. If you haven’t set up a cash flow forecast then I strongly suggest you open up a spreadsheet now and create one with me. I’m now going to help you do this step by step. Obviously you can go into a lot of detail breaking down income and outgoings to suit your business type, but I will give you the basics so that you have a good base to expand on. At this stage I would also like to dedicate this post to Jamie our business mentor who taught me everything I know about cash flow and forecasting. πŸ™‚

So now you have your spreadsheet open the first thing to do is to make a note of the year and horizontally across the top of the page put the months of that year. I measure our cash flow on our financial year (in our case its August to July) as this helps us work out averages for the year when we have completed that fiscal period. Down the left hand side of the months, (in a separate column) you can then set up invoiced values and perhaps break this down by services or products you offer. Under the month you’re currently in, you can then start to record details on money you’ve actually invoiced (Important *This is money invoiced NOT received). Add in a row at the bottom of this that sums the values above it to give you total invoiced value for that month (Sales Delivered). Now below that create a row called ‘Cash Inflows’. While you’re forecasting (i.e. the data is not real yet) I advise that you create a cell equation that automatically puts the SUM of the sales values for the current month in 2 whole months later for the cash inflows row (when forecasting this allows for the time difference between invoicing and people actually paying you). This is important because as I mention earlier in the post it doesn’t matter how much you invoice, if you don’t get the money in quickly enough. Obviously when you complete an actual month you can put real values into this ‘cash inflows’ column.

So you’ve now got rows of sales values and cash inflow. You may wish to separate these easily with a heading, in a way that suits you, such as INCOMINGS.

Now we’re onto OUTGOINGS which again you might wish to title.

I find it handy to break down our outgoings by Variable and Fixed costs. So for variables I would have rows for things like (you may have more than these):

  • Wages
  • Tax and NI
  • Project Costs (Costs that are only there IF you sell something)

Then list your overheads or fixed costs – This will include things like:

  • Rent
  • Rates
  • Electricity
  • Gas
  • Phone
  • Office Consumables
  • Marketing Material
  • Accounts and Bookkeeping
  • External Services (consultancy/mentoring etc)

Again, consider your business and which costs are important to you. I find it helpful to have a few more rows at the bottom of the spreadsheet for other costs such as:

  • Capital Expenditure
  • Corporation Tax
  • VAT payments (only applicable if you’ve included VAT in other areas of your spreadsheet)
  • Bank Costs
  • Sundries

It is probably wise to have a contingency row as well which i generally set between 1-5% of all costs above.

At the very bottom of the spreadsheet you should then sum the OUTGOINGS. Finally, create a row which subtracts the outgoings from the in-comings to give you your cash flow for that month.

You should also sum up the accumulation of the years INCOMINGS and OUTGOINGS down the right hand side of the spreadsheet, so you can get a grasp on how the year as a whole looks. This is especially useful when you have a good amount of actual data and want to see a snapshot of your business in any one year. Having a row at the bottom of the cash flow, with actual bank balance figures, will allow you to predict, based on changes in in-comings and outgoings, what effect decisions will have on your available cash. For example, you can easily put in another persons wages and see how this affects the coming year, or perhaps plan what would happen if you were able to increase your sales by 10%. THIS IS THE REAL POWER OF A WELL STRUCTURED CASH FLOW FORECAST.

As you move through the year, make sure you update the cash flow from budget (forecasting) figures to actual figures. I find that when forecasting you can use averages for the rest of the year. The more actual data you have, the easier this will be.

Now you have your cash flow setup you need to make sure you review it regularly. We review ours monthly, so we have a really good idea where we are at all times. Please make sure you update and review this as regularly as possible or there is no point doing it. You’ll probably find that if you are the one updating it (as I was in the early days of our business) it helps you have a fantastic grasp on your finances, but you may have other people to show and account to and this is a great way of doing this.

I cannot tell you just how important cash flow is and although not the most interesting of posts, I’d urge you to do this today if you haven’t done so already and get a better grasp on your business.

I have uploaded a sample cash flow forecast for you to look at and check whether you’ve followed the instructions above correctly. If you click on the image below it will load a larger version of this sample. Have Fun πŸ™‚

Sample Cashflow Forecast

Sample Cash flow Forecast

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  1. Mike Harmon on 16th August 2009 at 11:13 am


    I’m just getting started with my new blog. Would you want to exchange links on our blog-rolls?

    BTW – I’m up to about 100 visitors per day.

  2. Robin Dickinson on 16th August 2009 at 11:31 am

    Well done, Alastair.

    Excellent guide and the sample sheet is very handy.

    I also include an allocation for depreciation and bonus funds for shareholders (that would be me πŸ˜‰

    Best, Robin

    • Banksy on 17th August 2009 at 1:25 pm

      Thanks Robin,

      I tried to simplify it while keeping it useful. I was also trying to bear in mind that startups especially probably won’t be thinking about bonues πŸ™‚ Agree that depreciation should be included – it is in ours, probably an oversight on mine while deleting rows.

  3. […] So, be careful of not getting caught in the trap of thinking success is in Turnover or how many staff you have. I’ve made that mistake myself on a number of occasions. To be fair, it’s quite easy in our industry to flatter your turnover figures because more often than not digital agencies will pay for online advertising on behalf of clients (services like Google Adwords) then simply bill this straight back to the client. This has the effect of inflating your turnover but doing absolutely nothing for your bottom line. If you’re in digital and want my advice, then I’ve tended to stay away from this altogether as it can cause cash flow issues and as we know “Cashflow is King” […]

  4. […] you have no business. I’m not going to go over old ground again on this. I wrote quite a lengthy post about cashflow here and even gave a step by step guide on how to write a cash flow forecast – you have no […]

  5. Rahmouni on 28th August 2013 at 10:19 am

    Interesting Thank you for your effort !

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