As well as your business plan, a set of financial statements detailing you cashflow is essential. This will provide details of actual cash required by your business on a day-to-day, month-to-month and year-to-year basis.

The needs of a business constantly change and your cashflow will highlight any shortfalls in cash that will need to be bridged. Many established, viable, and even profitable businesses fail due to cash not being available when they need it most.

Good cashflow management is critical to running a successful business. You must be able to pay your bills while you await payment from your customers. There are many well-documented cases of businesses failing not because they weren’t profitable but due to poor cashflow management.

You’re in business to make a profit. It’s a simple principle, but one that can occasionally become lost amid dreams of building multinational empires worth millions of pounds. You won’t be able to stay in business, however, unless you have cash, hence the famous adage ‘cash is king’.

There will probably be a time lag between your business providing its goods or services and getting paid. This means you have to make sure there is sufficient cash in your company’s bank account for it to pay all its bills in the meantime – whether these relate to invoices from suppliers, employees’ wages, rent, rates, tax, sales tax or anything else.

Even if your business is profitable, there may be times when you are short of cash because you are awaiting payment for a large order. This is likely to be a particular problem during your first year when you are building up your business and don’t have regular cash inflows.

Fast inflows, slow outflows

The general principle of cashflow management is that you should speed up your cash inflows (customer payments, interest from bank accounts etc) and slow down your cash outflows within reason (purchase of stock and equipment, loan repayments and tax charges etc) as much as possible.

It can be difficult to affect your outflows other than extending your credit terms with your suppliers, which will often occur on fixed dates in the month and your employees and suppliers might also not take too kindly to you delaying payment to them. But there is more scope for you to improve your cash inflows.

This could mean billing regularly, chasing bad debt, selling your debt to a third party (factoring), negotiating extended credit terms with suppliers, managing your stock effectively (which could entail ordering little and often) and giving your customers 30-day payment terms.

Also, as businesses naturally have peaks and troughs, it is important that you put money away during the peaks so that you can dip into it during the troughs.

It is a good idea to think about investing in some accounting software to help you manage your cashflow. There are many software providers: an internet search should reveal the most common. Most provide software that can help you with cashflow analysis and forecasting, so that your business is never caught short of cash in the bank. Your accountant should be able to help advise you on which software package to buy.

Steps in developing a cashflow forecast

A cashflow forecast should look at least 13 weeks into the future. You need to prepare a forecast that will cover your main cycles but understand, especially in turbulent times, that you will need to revisit this on a rolling basis.

Here are some steps to prepare you to develop a cashflow forecast:

Step 1: Prepare a list of assumptions

Cashflow forecasts are based upon a set of assumptions that reflect how your business operates. These assumptions are based upon your prior experience of:

  • Pricing – both your own and your suppliers
  • Seasonality of sales
  • Sales growth
  • Overhead costs, including salaries and assets, such as machinery and buildings

Step 2: Estimate your sales

Understand your overall sales pattern and your customer base. Identify what payment terms are applicable across your customer base recognising that a sale may not equal immediate cash.

Understand also that a proportion of your customers will pay later than you anticipate and others may not pay at all. Cashflow modelling software may help you understand these patterns better.

Step 3: Prepare a list of other cash inflows

Organisations have other income streams, such as grants from governments, additional capital investments from stakeholders, additional borrowing or loan facilities. Each of these needs to timed and the extent of the inflow recognised.

Step 4: Prepare a list of cash outflows

Having recognised your income, you now need to identify the costs associated with this. These will vary according to your business but may include:

  • Payments to suppliers
  • Staff costs
  • Taxes (including employment costs, property charges, taxes on profits, sales taxes)
  • Purchase of new assets or equipment
  • Director payments
  • Loan repayments and interest
  • Royalties and franchise fees

Step 5: Collate the information and prepare your cashflow

Once you have collated this information you can prepare your cash flow. Simple cashflow forecasts can be prepared using templates such as the one outlined below.

Accounting software often includes, either directly or through add-ons, cashflow modelling tools. You may choose to utilise these, especially if you already have transactions recorded that can form the basis of the future forecast.

Step 6: Challenge your assumptions

In challenging times, such as those that we face at present, normal assumptions may not apply. One of the benefits of developing a cashflow forecast is to understand the constraints that you have, for example if a supplier pays you late do you breach a banking covenant?

Additional considerations to include in your cashflow in these turbulent times may include:

  • Additional government grants or reliefs available and the timing of when these will be received
  • Government and other loan schemes that provide short-term liquidity
  • Cost reductions, such as staff recruitment freezes and deferment of capital expenditure
  • Impact on your supply chain, including deferment of supplies and reduced customer demands
  • Increased working capital (the amount of stock unsold) due to changing customer behaviours
  • Factoring receivables and other sources of credit finance and credit insurance
  • Utilising business impact insurance, where applicable
  • Non-traditional revenue streams, such as provision of critical supplies
  • Loan repayment holidays and tax payment deferrals

Use the basis of this cashflow to communicate regularly with lenders, suppliers, investors and government agencies. Keep remodelling as the assumptions will rapidly change.

Use cashflow forecast template

ACCA’s cashflow template will show you how a cashflow works and should be amended to suit your own business.

All figures to be entered are actual cash. This includes bank payments and receipts, cheques, bank transfers, cash payments and receipts – all of these should be included in your opening balance.

Then complete the shaded area opening balance, which includes bank, loan and cash balances and should be put in the sheets:

  • monthly cashflow forecast
  • monthly actual cashflow

This provides the starting point for the rest of the cashflow. Next, input your month 1 forecast – all the sales broken down into the elements of your particular business – and do the same for expenditure. Base your figures on your own experience and what you forecast to receive or pay. The sections can be amended to reflect your business’s requirements.

Repeat this process for the actual cashflow; here the figures you input are based on actual. This should then automatically be displayed in the third sheet:

  • monthly cashflow forecast/actual comparison

This is where the real analysis work is done and will determine the accuracy of your forecast figures. The forecasts sheet should be used to determine when you may have a cash shortfall before the event arises and will help determine whether you will need to obtain additional funding.

The ACCA cashflow template can be downloaded from:

Cashflow spreadsheet

Other helpful links

ACCA’s Introduction to Excel

Microsoft Office Specialist Excel 2019

Analysing and visualising data with Excel