Why cash flow is so important

Your business needs cash to survive.  Our article on Improving your cash flow will give you some simple ideas on effective cash flow management.

Even if your business is profitable on paper, you need cash flowing into the business faster than it's flowing out.  If it doesn't you'll very quickly find yourself in a position where you're unable to pay your suppliers or your staff. 

If you get to that stage your business is deemed 'insolvent' and it's unlawful to carry on trading unless you find some form of additional financial funding.  If you're a director of a limited company that's operating whilst insolvent you risk being fined and barred from holding any directorships in the future.

Here's how to create a cash flow forecast

What's in a cash flow forecast

A typical cash flow forecast is divided into:

• Receipts – which is all the cash coming into your business, such as sales revenue and any loans you've taken out
• Outgoings – which is all the cash going out of your business, such as buying stock or raw materials, office costs, or loan repayments
• A monthly cash balance, and a cumulative cash balance which should equal to the amount of cash in your bank account.

What does a cash flow forecast tell you

Cash flow planning:

• Helps determine when you expect to get paid and when you need to pay your own bills.  You'll then be able to check you have enough cash in the bank to pay your bills.  Then do some ‘what if’ scenarios to measure the impact of, say, a 5% dip in sales, or a 10% increase in costs to help you build some contingency into your figures.
• Shows when there's likely to be a negative cash flow, ie a shortfall, so you have time to arrange suitable finance in advance rather than trying to find working capital quickly once you hit a cash flow crisis.  If you're in this position take advice from a qualified accountant or business adviser, rather than the organisation that's going to loan you some money.
• Shows when there may be a positive cash flow, ie a surplus, so you can plan in advance how to use or invest it.

Your cash flow forecast is a critcal business management tool. Update your forecast with actual numbers as soon as they're available so the forecast becomes your actual cash flow position as you go through the year.

Other business financial reporting tools

Profit and Loss Accounts

Balance Sheets

Break Even Analysis