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Cash Flow Forecasts for Small Businesses

Just as plants need water, businesses need cash to stay healthy. This is what cash flow is all about - the money flowing through your busines

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Just as plants need water, businesses need cash to stay healthy. This is what cash flow is all about – the money flowing through your business – and it’s absolutely essential.

Cash flow forecasting goes hand in hand with any conversation about cash flow. It helps you predict how much cash you might have in the future so you can plan ahead and make big decisions. Whether you want to expand, get a loan or simply understand how your business is progressing, cash flow forecasts are powerful financial instruments.

In this article we are going to look at the basics of cash flow predictions for small businesses. By reading this, you have everything you need to get started.

What is cash flow?

To learn about forecasting, the first thing you need to understand is cash flow itself. The most important thing to remember is that cash flow refers to both the money that moves into your business and the money that moves out of it.

Cash comes out mainly in your business that you make through sales, but you can also have a loan, a credit line or a recent tax rebate. In terms of the cash that goes out, we are talking about all the money your business spends: rent, taxes, salaries, along with other expenses like marketing, insurance and more.

Let’s say you run a dry cleaning business, where you make the most of your money through cleaning and alterations. If you have just taken out a loan to buy new equipment, the amount you borrow will also come in. Most of the cash that goes out will probably be used to pay suppliers, staff and your own salary, as well as things like taxes, operating costs and loan repayments.

What is a cash flow forecast?

Cash flow forecasts help you calculate how all this money coming and going in the future might behave. But if you want to build a forecast, you need to know how money has flowed through your business in the past.

Thus, a cash flow forecast for a new business may look different as it will have less financial history, which is the building blocks of a forecast. If you trade longer, with good financial records, you will be in a better position to predict further.

What does a cash flow forecast show?

Cash flow forecasts are basically detailed spreadsheets. At the top you will have the months of the year, with the rows below dedicated to your income and expenses for each month. You can add your monthly income figures, along with all the money that goes out, divided into categories such as general expenses and loan repayments.

The most important thing that your forecast shows is your net cash flow, which is the difference between the amount of money going out and the amount of money coming in. Your net cash flow shows whether your business is earning more cash than it is burning, or vice versa. versa.

With prediction software, which can connect to Sage, you can get something more visual, depicting the peaks and troughs of your cash flow using a line graph.

Why are cash flow forecasts important?

So how can a cash flow forecast help a business? Above all, it is excellent financial barometers that allow you to see under what kind of pressure your business may be under. Many things can cause cash flow problems – from outstanding payments to uncontrolled growth – and forecasting helps you spot those problems early.

If you know what to expect, you can make better decisions. With a cash flow forecast, it’s easier to understand if you can afford to make that next big rent or invest in a new piece of machinery.

Lenders are also interested in this information. Like pay slips for a mortgage, a cash flow forecast helps you prove your business’ performance when you want to borrow.

How to create a cash flow forecast

An easy way to prepare a forecast is to use a cash flow forecast template, which is a ready-made spreadsheet. You can find one in Sage’s free small business toolkit

If you want to go deeper into predictions, you can find more details here. But here are the key things you need to build your own cash flow forecast:

  1. Your bank balance: Depending on which month you start your forecast with, find out what your balance was at the beginning of that month.
  2. Your income: List the money that comes in each month, using invoices, existing contracts and previous years’ sales figures, along with things like grants and tax refunds.
  3. Your expenses: List everything you spend each month, from rent to salaries to the gasoline you pour into your van.

If you do not use software to track your income and expenses, things can get a little difficult. Find out how Sage can help you keep better digital records, as part of its Making Tax Digital Center.

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