How Do I Manage And Forecast Cash Flow?

How do I format my invoices?

How Do I Manage And Forecast Cash Flow?

Once you have done the work on estimating the cash flow’s into the top of your Cash Funnel and the expenses that will flow out the bottom, you then stand a chance of working out whether your business is going to work or not.

We’ll start by looking at a simple model and then move on to look at proper cash flow forecasting.

Money management on a postcard

With your basic expense and income figures to hand you can begin to see whether your idea is viable:

If you know your Survival Budget…and add that to the estimated Running Costs of the business (your expenses), you then have an idea of the basic amount of money you need to make each month. To make it more realistic, add in the extra money you would like to make to give you a better lifestyle and you now have a Sales Target. See the “Choosing the Right Price” for an explanation of this but for the moment here is a really simple example that you could do on the back of a postcard.

A simple cake business:

Money management on a postcard - actions:

Whilst this calculation is helpful and may frighten you off a stupid idea it has a major flaw because it is a snapshot. It takes no account of the timing of your cash flow and we’ve already seen with the cash funnel that it’s timing that is probably the most important thing (remember the example of selling a car). Consider the cake example above. It implies that you need minimum sales of 2,000 cakes a month and you might be tempted to abandon the idea if you could not see a way to making these sales. But that’s not the whole picture is it? You might have an overdraft or loan or some redundancy money that could tide you over while your sales build up and so sales of 500 cakes a month might be OK while your business grows. You won’t know this for sure though unless you go beyond the postcard.

Money management beyond the postcard

Your cash flow forecast

If you are serious about this idea you will need to go beyond the back of a postcard and create a cash flow forecast. This is your major control document and using it will help you to keep the cash funnel full.

Start with 12 columns or a spreadsheet. Actually, I recommend starting with lined paper because unless you have a very large screen you will find it easier to see the whole year on paper. Put it onto a proper spreadsheet once you have done some work with the figures.

J F M A M J J A S O N D

or like this:

1 2 3 4 5 6 7 8 9 10 11 12

Then think about what you will spend - CASH OUT:

J F M A M J J A S O N D
CASH OUT - estimate your future spending. Add as many rows as you need.
Employment
Premises
Repairs
Admin £ 250
Motor
Travel
Subsistence
Promotion
Bank Charges £ 10 £ 8 £ 7 £ 15 £ 5 £ 7 £ 8 £ 9 £ 19 £ 25 £ 15 £ 16
Interest
Raw materials
Totals £ 10 £ 8 £ 7 £ 15 £ 5 £ 7 £ 258 £ 9 £ 19 £ 25 £ 15 £ 16

Enter the exact date when the money is going to move out of your bank account. For example: If you have a £250 telephone bill due in July then put the money on the telephone line in the July column. This way you build a picture of exactly what you will spend and more importantly, WHEN you will spend it.

Then think about the money you will receive - CASH IN

Remember that cash can come into your business from three places:

You may choose to record your CASH IN by customer name, by customer category, by product/service or even by type of money (cash, cheque, BACS, credit card).

The example below shows three customers lines, a line for your cash and a line for borrowings:

J F M A M J J A S O N D
CASH IN - estimate your future sales. Add borrowings. Add any money you will lend the business.
Customer 1
Customer 2
Customer 3
Loans
Loan from you
Totals

This is the hardest part. You have to estimate when you are going to receive money and where it is coming from in the next 12 months.

Have a different row for each customer, or each type of product you sell or some other way that is useful to you.

Now it should look something like this:

J F M A M J J A S O N D
CASH IN
(Lots of headings) £ 100 £ 50 £ 200 £ 55 £ 375 £ 200 £ 100
CASH OUT
(Lots of headings) £ 150 £ 100 £ 345 £ 175 £ 50 £ 75 £ 85
Cash IN minus Cash OUT £ -50 £ -50 £ -145 £ -120 £ 325 £ 125 £ 15

You can now see the cash position at the end of each month and whether that funnel is in danger…

Add a running total

J F M A M J J A S O N D
CASH IN
(Lots of headings) £ 100 £ 50 £ 200 £ 55 £ 375 £ 200 £ 100
CASH OUT
(Lots of headings) £ 150 £ 100 £ 345 £ 175 £ 50 £ 75 £ 85
Cash IN minus Cash OUT £ -50 £ -50 £ -145 £ -120 £ 325 £ 125 £ 15
Running Total £ -50 £ -100 £ -245 £ -365 £ -40 £ 85 £ 100

The running total shows that by the end of month 7 we have £100 in cash to show for all that work - hmm!

Cash Flow Actions:

Will you make money?

The whole template

Get a PDF from the downloads page but for now, this is what the whole thing looks like.

J F M A M J J A S O N D
CASH IN - estimate your future sales. Add borrowings. Add any money you will lend the business.
Customer 1
Customer 2
Customer 3
Loans
Loan from you
Totals
CASH OUT - estimate your future spending. Add as many rows as you need.
Employment
Premises
Repairs
Admin
Motor
Travel
Subsistence
Promotion
Bank Charges
Interest
Raw materials
Totals
Making sense of it: NET CASH is cash IN minus cash OUT. RUNNING TOTAL is the cumulative net cash
NET CASH
RUNNING TOTAL

Everything you need to know about the mechanics of setting up a business in the UK

Buy The Book

This briefing note is an extract from The Red Stuff Handbook™

Understand the 12 key decisions you need to make to set up your business.

Who is this for? It isn’t for people who just want the theory and don't want to use it. Only purchase this product if you want fast, practical help with the mechanics. It's for people at the transition stage who have been curious and concerned about the mechanics and want to arm themselves with some information and answers before talking to other professionals. It is, for example, an ideal handbook to work through before you start talking to accountants.

As well as the complete set of briefing notes you find a comprehensive checklist to guide you through the mechanics and all the details about legal structure and tax savings. As you read through this guide you'll pick up all the tips you need to master the mechanics of setting up a business. Take a look now.