Why you need a cash flow forecast…

Coronavirus has presented challenges for businesses

Here is why having a cash flow forecast is vital.

Every business needs enough cash to function

Sounds obvious, but you would be amazed at the number of businesses we see that really have very little idea if they will have enough cash or not, an issue which has been exacerbated by the recent coronavirus pandemic.

The answer to this is to have, and to update, a cash flow forecast as part of how you control and manage your business.

A cash flow forecast is a useful tool to predict how much money you will have in your business each month.

Without one, it is very difficult to plan for what cash the business may need or may generate over the short to medium term. We assist many of our clients with creating and maintaining cash flow models, without which they would struggle to manage their cash needs.

So how does it work?

A forecast looks at the inflow and outflow of money into your business over the coming months and allows you to recognise where the business will have a surplus or a deficit of cash.

It goes without saying that we all hope to have more coming in than going out – but only through running a cash flow forecast will you have the definitive answer!

An accurate cash flow forecast is not difficult to achieve, so long as you follow a few simple principles. Remember that it is a prediction of what you think is going to happen in the future, so the more accurate the information and predictions you can feed into the cash flow, the more accurate your cash flow model will end up being.

Sales forecasts

Some businesses have a defined pattern of sales throughout the year, so it is usually straightforward to estimate what your sales figures are likely to be, not forgetting to factor in an element of sales growth or shrinkage for what you think will happen over the next 6-12 months.

If your business does not have a defined sales pattern, this makes it much harder to forecast what your revenues are likely to be. In these instances, using historical data, and drawing on management’s experience can prove useful when coming up with a sales prediction.

Either way, a business with lumpy or unpredictable sales will require a much greater degree of thought to come up with a sensible sales forecast. Optimism can sometimes take over at this point, so, particularly at this time, make sure your forecasts are achievable and based on sound assumptions.

Recording cash inflows

Where the business receives cash in settlement of invoices, these inflows must be recorded in the cash flow. Most businesses operate on credit terms of 30 days, but what if your usual payment profile is more like 60 days after the invoice is raised, this must be reflected accordingly.  Also, with the effect of the coronavirus pandemic, you should consider whether there will be any delays in receipt of payment.

Expenses

Not all expenses can be accurately predicted, but there are regular recurring payments for which you will have accurate figures, such as wages, rent and utility bills.

When looking at stock purchases, take into account seasonal fluctuations. Many businesses spend more on their stock during the Christmas period, for example.

At present, also consider whether any payments can be deferred or mitigated, for example you may be able to furlough employees under the Coronavirus Job Retention Scheme (“CJRS”), defer VAT or rates payments or request a rent holiday on your premises.  You may also be able to suspend payments on account for personal tax, meaning the amount you need to take out of your business can be reduced in the short term, helping to ease cash flow pressures.

There will also be some unexpected expenses you are unable to predict, but you could set aside an amount based on a percentage of your outgoings to cover yourself. Then, if no unexpected expenses occur, your actual cash flow may exceed expectations.

cash flow forecast
Regular cash flow projections

You can create cash flow projections on a monthly basis, but it is worth considering fortnightly or even weekly forecasts. Regular projections give you the tools to anticipate the financial health of your business. If you predict that cash flow will be low during a period, you can prepare for this.

What if you don’t have the resource to prepare regular cash flow forecasts?

We all know that it can be difficult to fit everything into the working week, and naturally the more difficult or complex tasks sometimes get ignored in favour of other things.  If you find you don’t have the time to prepare and update cash flow predictions and forecasts, then why not let the professionals do it for you.  At Roffe Swayne we work with SMEs to prepare and maintain user friendly forecasts which can be a lifesaver when attempting to predict available cash, particularly in these uncertain times.

Many of our clients also find that the cost of using our outsourced accounting services is in fact a lot cheaper than employing someone to fulfil this role.  When you add to that the flexibility, technical ability, and objective views that an outsourced accounting provider can add, the decision to outsource is often an easy one to make.

Using your forecast

This is the part many businesses miss! We discuss forecasts and management information with our clients to assist them to take appropriate actions based on their forecasts and circumstances.

If you are going to be short of cash – looking ahead, what actions can you take now to manage this? Actions could include:

  • More focus on sales as, ultimately, sales = cash in
  • More focus on debt collection & effective credit control
  • Defer or stop discretionary areas of spend
  • Consider assistance with expenditure / deferrals available as part of the government’s package of support in connection with the coronavirus pandemic, such as furloughing staff under the CJRS and deferrals of VAT / rates payments.
  • Look at ways of raising finance.  Do you need a loan or more working capital?  We can advise on appropriate sources, including government support to businesses during the coronavirus pandemic, such as the:
    1. Coronavirus Bounce Back Loan Scheme
    2. Coronavirus Business Interruption Loan Scheme

If you are going to have a cash surplus – what opportunities does this give you? These might include:

  • Investing in growing your business, whether organically or through acquisition
  • Investing in other assets, such as property
  • Placing the cash surplus in low risk, liquid investments, such as savings accounts or government bonds so that it is available on demand should it be required quickly
  • looking at your remuneration, dividends or pension planning for instance if your business is an owner managed business

We can assist you with all the above and, whatever actions you choose to take, with optimising your tax position.

For more information

For more information on our cash flow forecasting service, please contact either:
Scott Harrower, Andrew Bagley or Lulu Emms, or call us on:

01483 416232