What a cash-flow forecast is: spotting a shortfall before it arrives

1. A cash-flow forecast is a month-by-month estimate of the money a business expects to come in and the money it expects to go out, set out with one column for each month.
2. Its job is to show a shortfall before it happens, so the owner can arrange an overdraft or delay a payment while there is still time to do either.

Cash inflows: money arriving in the bank account

1. Six inflows cover almost every figure a forecast asks you to enter.
   1. Cash sales: money taken at the till or through the website on the day the customer buys.
   2. Payments from credit customers: cash from sales made earlier, arriving when the invoice is settled, often 30 days later.
   3. Owner's capital: savings the owner pays into the business, usually a one-off sum at the start or when more money is needed.
   4. A bank loan being received: the whole sum lands in the account in one month, and the repayments become outflows in later months.
   5. Selling an asset: cash raised by selling a van, an oven or a machine the business no longer uses.
   6. Grants: money from a council or government scheme that does not have to be repaid.
2. An inflow is money arriving in the bank, so Greggs records the cash the moment a sausage roll is sold at the till, while a bakery invoicing an office caterer on 30-day terms has made the sale but has no inflow until the customer actually pays.

Cash outflows: money leaving the bank account

1. Every outflow is entered in the month the money genuinely leaves the account, not the month the order was placed.
   1. Buying stock or raw materials: flour, packaging or goods for resale, usually the largest and most regular payment a small firm makes.
   2. Wages: paid weekly or monthly, and due whether trade that month was strong or weak.
   3. Rent, energy and other overheads: payments for the premises, electricity, insurance and phone line that fall on fixed dates.
   4. Loan repayments and tax: a set repayment to the bank each month, plus VAT and corporation tax paid to HMRC on their due dates.
   5. Buying equipment: a one-off payment for an oven, a till system or a van that hits one month hard.

A worked month: totalling March for a bakery in Leeds

The two tables below set out the figures a bakery in Leeds expects for March, with everything coming in shown first and everything going out shown second.

1. The figures that get compared are the two totals at the foot of each table: £8,200 came in against £7,450 going out.
2. More cash came in than went out that month, so the bakery ended March with a larger bank balance than it started with and did not need to borrow.
3. Stock at £3,100 is the largest single outflow, so a supplier who charges less for flour frees far more cash than trimming the £350 energy bill ever could.
4. A forecast is only an estimate, so one credit customer paying in April instead of March, or a supplier raising a price, pushes the real figures away from the plan.
5. The next guide turns these two totals into net cash flow and a running opening and closing balance.