Your cash flow forecast: The key to surviving and thriving

Managing a small business without a cash flow forecast is a bit like driving at night with sunglasses on. You’ll probably be moving in the right direction, but maybe not for long. You could be blind to critical dangers that could stop you in your tracks.

What is ‘cash flow’?

Cash flow is the movement of money in and out of your business. A positive cash flow means you’ve got more cash coming into the bank than you’re spending. A negative cash flow means you’ve got more cash going out than you’ve got coming in.

Why is a cash flow forecast important?

If your cash flow is negative, it can be a major warning sign. It doesn’t take many weeks or months of not having enough cash before you find yourself going out of business. Suppliers start demanding payment, landlords start changing the locks and salaries go unpaid.

So cash flow management is vital and to do this you need a reliable forecast.

Every month, you’ll have regular bills to pay (cash flowing out). Salaries and rent are important and will be among the highest amounts. Suppliers and raw materials might be up there too. Plus you’ll be spending as you go on unplanned expenses.

You can only pay those bills if you’ve actually got money in the bank and understanding the source and certainty of this income is essential.

You might feel good that your sales pipeline is encouraging. You might have had lots of enquiries recently, or won new customers. That’s all great. In theory, the outlook is strong.

But you can’t pay bills with theoretical money. It needs to actually be in your bank account, ready to spend. If you don’t have it when you need it, outgoings can easily swamp incomings.

This is where cash flow planning and a cash flow forecast come in. It’s about making sure you know when you need to pay money out, when you’ve got money coming in, if there’s a shortfall coming up, and if you need to take action.

Three tips to improve cash flow

1. Invoice early and often. Get money into the business

Clients rarely pay until they are invoiced. Have the invoice ready and prepared to send as soon as the work is done or the product is shipped.

2. Control spending. Stop money leaving the business

This is important in the early days. Focus on the essentials. Have you shopped around for the cheapest utility providers? Can you spread the cost of big purchases - like laptops and vehicles - by leasing instead of paying in one go? Control costs and keep hold of your cash.

3. Get smart digital products to help with your cash flow forecast

Accurate, reliable financial forecasting information is your best friend. It takes the guesswork out of cash flow planning and gives you time to take action. So get yourself good small business accounting software that can help you.

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Jenni Chance

Jenni Chance

Senior Manager, Entrepreneurial & Private Business, PwC United Kingdom