How forecasting can improve cash flow

Understanding your cash flow has always been an essential part of working for yourself. With this in mind, QuickBooks’ comprehensive guide to improving cash flow has tips on what a cash flow forecast is, how cash flow can be forecasted, and what the advantages of cash flow forecasting are.

For many small businesses, cash flow is something they discuss with their accountant. If you have an accountant, you can easily connect them to QuickBooks so they can see all your finances in one place. If you don't yet have an accountant, but would like some professional advice, you can search our directory to find an accountant that is local to you or specialises in your industry. 

What is cash flow?

Let’s start with a definition of cash flow. “Cash flow” is a term that refers to how cash moves in and out of your business and your bank account. Cash inflows are your sources of income, and cash outflows are your business expenses.

Understanding and managing cash flow is fundamental for effective financial management. This is because it provides businesses with insights into their liquidity, income sources, and expenditure patterns. 

What is the definition of a cash flow forecast?

A cash flow forecast is a financial management tool that provides a projection of how cash will move in and out of a business over a specific period, typically in the short to medium term. 

The forecast takes into account both cash inflows, which represent sources of income, and cash outflows, which include various business expenses.

The process of generating a cash flow forecast involves analysing historical financial data and using it to make informed predictions about future cash movements. This forecasting allows businesses to gain a clear understanding of their current financial state and estimate how long they can sustain their operations based on their typical cash flow patterns.

What type of businesses use a cash flow forecast?

Cash flow forecasts are beneficial for a wide range of businesses across various industries. Small, medium, and large enterprises alike use them to gain insights and make informed decisions. 

They are particularly valuable for businesses that experience fluctuating income and expenses, seasonal variations, or those navigating economic uncertainties. In particular, cash flow forecasts are commonly used in industries like retail, hospitality, and manufacturing.

However, any service-oriented business, startups, or established corporations may utilise cash flow forecasts for the insights they provide. Essentially, any business that aims to maintain financial resilience, improve liquidity, and plan for sustainable operations can benefit from incorporating cash flow forecasts into their financial management practices.

There are a range of other benefits to cash flow forecasting, too:

What are the advantages of a cash flow forecast?

Conducting a cash flow forecast calculation has a multitude of benefits for businesses of all kinds. These advantages include improved operational insight, more assured risk management and increased stakeholder confidence. 

Let’s explore these cash flow forecast advantages in more detail:

• Operational insight: The forecasts can offer a clear picture of the current financial state, enabling businesses to assess how long they can sustain operations and adjust accordingly.

• Risk management: Businesses can identify potential cash flow challenges and risks, allowing for the development of contingency plans and strategies to mitigate financial uncertainties.

• Improved vendor and supplier relationships: Improved visibility into cash flow can aid in negotiating favourable payment terms with suppliers and vendors, strengthening business relationships.

• Debt Management: Businesses can use cash flow forecasts to manage debt effectively, ensuring that loan repayments align with their cash flow capabilities.

• Resource Allocation: The forecasts can help in allocating resources efficiently, allowing businesses to prioritise areas that contribute most to cash flow and overall financial health.

• Stakeholder Confidence: Demonstrating a proactive approach to financial management through cash flow forecasts can enhance stakeholder confidence, including investors, lenders, and employees.

So, now we know what the benefits to utilising cash flow forecasting are, how can you make one for yourself?

What are the main components of a cash flow forecast?

To create a cash flow forecast, you need to know what elements are typically included in such a calculation. The main components of a cash flow forecast include:

• Starting Position (Opening Balance): This represents the initial cash in the bank at the beginning of the forecast period.

• Expected Cash In: This encompasses the anticipated cash inflows, primarily derived from sales, but may also include funds from loans or sales of assets.

• Expected Cash Out: This involves projecting the cash outflows, providing an overview of anticipated expenditures during the forecast period.

• Net Cash Flow: This is the result of subtracting expected cash outflows from expected cash inflows. It indicates whether cash reserves are projected to grow or shrink during the specified period.

• Closing Balance: This represents the projected cash position at the end of the forecast period, taking into account the starting position, expected cash in, and expected cash out.

• Receipts (Broken Down): A more detailed forecast breaks down receipts by cash flow item or classification, offering a granular view of income sources.

• Total Receipts: The sum of all anticipated cash inflows during the forecast period.

• Payments (Broken Down): Similar to receipts, payments are broken down by cash flow item or classification, providing a detailed overview of expected expenditures.

• Total Payments: The sum of all anticipated cash outflows during the forecast period.

• Net Movement: This can be calculated either by individual cash flow item or, at a minimum, as the total net movement, representing the overall change in cash position.

Cash flow calculation example

Now we know the main components of a cash flow forecast and the advantages of making them, it’s also worth knowing how this looks in practice. With this in mind, here is a cash flow calculation example that you can bear in mind.

1. Starting Position (Opening Balance): As of July 1st, Company A has £20,000 in their business bank account.

2. Expected Cash In:

   • Revenue from completed projects in July: £30,000

   • Client deposit for upcoming project: £5,000

Total Expected Cash In: £30,000 + £5,000 = £35,000

1. Expected Cash Out:

   • Rent: £2,000

   • Salaries: £15,000

   • Marketing expenses: £1,000

   • Office supplies: £500

   • Loan payment (principal + interest): £2,500

Total Expected Cash Out: £2,000 + £15,000 + £1,000 + £500 + £2,500 = £21,000

Cash Flow Forecast for July (GBP):

This example shows a positive net cash flow of £14,000 for Company A in July. This indicates the consulting firm is expected to have more cash coming in than going out during the month. The closing balance reflects the projected increase in cash reserves to £34,000 by the end of July.

Breakdown of Receipts and Payments (Optional):

As mentioned before, a more detailed forecast might further break down receipts by project or client and payments by expense category. This additional detail can provide valuable insights into the firm's cash flow drivers.

How to make a cash flow forecast

With the help of Quickbook’s intuitive cash flow forecasting software and custom tools, you can easily generate cash flow forecasts of your own.

For a simple overview, download our cash flow forecasting template to help you get a clear view of where your business stands.

Before you start, make sure all transactions are reconciled and the books are clean. To put together the forecast, you’ll need the data from your existing software or excel. To begin, you’ll need to run the below reports:

• Run a Profit and Loss report for the past 3 months to understand the average income and expenses for each month.

• Run the Open Invoices report so you’ll be able to see anticipated sources of cash. 

• Run the Unpaid Bills report to identify expected short-term cash outflows.

Maximising alternative income sources

After you analyse your current cash situation and create a forecast, you can focus on identifying the best ways to manage your cash flow.

How to increase cash inflow

Speeding up existing revenue streams or finding new ones can result in an injection of cash that you can use to keep business on track. Here are some of the easiest ways that you can increase cash inflow for your organisation. 

Streamline your payment process 

Make payments easier and faster for your customers. QuickBooks has several ways to help you reduce the number of outstanding invoices you have and get paid faster: 

• Use the Open Invoices report to see which customers owe you the most. You can prioritise how you approach them. For a detailed breakdown of how much each customer owes and the due dates, check the Customer balance detail report.

• To cut out any unnecessary delays, you could try pay-enabled invoices. By adding PayPal’s ‘pay now’ button to a bill, your customers can settle up in seconds using a debit or credit card. GoCardless is an integrated app, perfect for recurring payments, such as subscriptions.

• Any QuickBooks invoice can be tracked, so you know when it’s been opened and viewed. Automated reminders prompt customers before payments become overdue. 

Other options

We’ve been blown away by the creative ideas that businesses have come up with to adjust their operating models and increase revenue. Here are some ideas that might work for you. You could:

• Offer discounts on your products or services.

• Move your operations online by creating a virtual shop or classes/consultancy via Zoom/Instagram Live.

• Personalise invoices and send them out immediately to increase the chances of prompt payment.

• Make it easy for customers to pay by accepting credit or debit card payments online with pay now invoices. 

• Give discounts to customers who pay within a reduced time frame.

• Create gift cards which can be redeemed at a later date.

How to reduce cash outflow

The less money you spend, the longer your cash reserves will last. Several strategies of reducing cash outflow can cut your expenses and have an immediate effect on your cash flow.

Reduce or defer essential payments

Work with suppliers, lenders, and HMRC to explore options for deferring payments or restructuring terms and rates. Report data from QuickBooks can help you decide who to contact first and use tips on communicating with suppliers

Reduce fixed expenses

Large monthly expenses are the easiest to identify. Reducing them could have a significant impact on the amount of cash that’s available for your business. 

You can use the Transaction Detail by Account report to see your average monthly rent and Insurance costs. You can run a payroll report to understand the cost of paying your team – then you can explore a variety of options for keeping costs down. 

Check current bill status

Start with the bills that are already due (or overdue). Suppliers may be flexible on timing or be able to offer payment plans. Contact them sooner rather than later and explain your situation. We’ve put together some templates for negotiating payment terms with suppliers which you may find useful. 

The Unpaid bills report will give you a snapshot of due and overdue bills. 

To see how much you owe each person or company, use the Expenses by supplier summary.

Cut back discretionary spending

Some expenses may be essential, but there are plenty that you can control. Identify items that aren’t necessary—either in the short term—to take some pressure off your cash flow. 

Marketing and advertising

Many businesses are cutting back on their marketing budget for the next few months. You may be able to do the same. To see how much you could save look at the Transaction detail by account report. 

Subscriptions and memberships 

Cancelling or suspending non-essential subscriptions and memberships means immediate savings. To track fees or ongoing subscription expenses, use the dues and subscriptions Transaction detail by account report.

Staying a step ahead

The cash flow trend tracker and planner in QuickBooks Online can help businesses to forecast and plan potential scenarios that may affect business cash flow. 

There are also great apps available to use and connect to QuickBooks.

• Fathom allows you to track business performance at a glance - you can see financial intelligence, customisable performance reporting, dashboards and consolidations.

• Float provides a real-time, visual view of your cash flow. Your actions and insights are ordered in terms of priority, and you can set and track budgets.

At Quickbooks, we’re here to aid you in improving your cash flow. That’s why we’ll continue to create tools and content to help, so look out for our weekly email updates.  For more information about resources and tools, as well as the latest official guidance, visit our dedicated web page.

The information on this website is provided free of charge and is intended to be helpful to a wide range of businesses. Because of its general nature the information cannot be taken as comprehensive and they do not constitute and should never be used as a substitute for legal, accounting, tax or professional advice. We cannot guarantee that the information applies to the individual circumstances of your business. Despite our best efforts it is possible that some information may be out of date. Any reliance you place on information found on this site or linked to on other websites will be at your own risk.