Top tips for small business cash forecasting

Small businesses rely on cash forecasting to ensure stable management of cash flow, helping to avoid unexpected expenditure and plan future investment.

Your forecast should be formulated in three sub-sections: sales forecast, profit and loss forecast, and cash flow forecast. Here are our top tips for effective forecasting:

1)     Be comprehensive with your costs

You must list all costs, no matter how small or intangible.

• Your sales forecast should focus on the amount of business you are likely to receive and how much you predict to earn, not the amount you expect to be paid by customers (this comes under your cash flow forecast).
• For your profit/loss forecast, consider all of your outgoings, including day-to-day running costs such as delivery expenditure or software subscriptions.

Even when cash is not leaving your bank account – e.g. mileage, depreciation or business use of your home – these costs should be included for an accurate forecast.

2)     Cash flow forecasting considers all costs and dates

Cash flow forecasts have to include all money moving in and out of your business account. Investment from the bank, friends or family should be included, as should non-operational costs such as taxes or expenditure on new business equipment.

Don’t forget to factor in the time it takes customers to pay and the time that suppliers allow for you to pay them.

3)     Inclusion of VAT depends on your registered status

If registered for VAT, your sales and profit/loss forecasts should exclude VAT that will be charged to customers and reclaimed on costs. If you’re on a flat rate VAT scheme or can’t reclaim VAT on a specific cost, included this in your profit/loss forecast. Include VAT paid to HMRC in your cash flow forecast.

And finally: keep your forecasts regularly updated to include any new costs such as office upscaling or changes to agreements with primary customers. This gives you the best picture of your business’ health. For more advice and help in managing your small business accounts, please contact our expert team at 3 Wise Bears.