Carl Taylor Accountant and Business Consultant

Most business owners I’ve met have got some kind of vision for where they want their business to be in a years time. 

You have some form of overarching goal – you want to hit £5m sales at 35% GP and want to have £500k cash at bank.  It is critical to have this clear and set down in a business plan before the year starts.

Then a cashflow forecast bridges the gap between where you are now and that vision you have for where you want to be, and it tells you exactly what the journey is going to look like from now to the end of the year.  It tells you what perils you will face on the journey and tells you what altitudes you will reach.

The key reason for having a cashflow forecast is to give you a plan to work to, and to drive action.  What kind of action?  Imagine your forecast is telling you cashflow is going to be very low in August this year, it should drive you to get an action plan in place ahead of time to:

  1. Focus on debtor collection to ensure we’re getting cash in from customers on time, especially in August
  2. Review stock requirements in August – what can we hold back on purchasing until September?
  3. Review costs in Q3 – what can we chop out or defer until Q4?
  4. Get extra finance if you need it

So the point is that it should drive action to smooth out the journey towards your goal, to take action well ahead of time to prevent your business grinding to a halt due to poor cashflow.

But, you’ll struggle to take action from an inaccurate cashflow forecast.  How can you make your cashflow forecasting more accurate?  Here are 4 keys:

Make sure your sales targets and predictions are realistic

Your sales target is the one figure that will make or break the accuracy of your forecast, so you need to challenge it from all angles and break it down into targets by customer group, and product type so you have robust, rigorously challenged sales prediction to hang the forecast on

Make sure your GP% forecast is accurate

Drill into your GP% and ensure your forecast is accurate, as this will have a significant impact on cashflow.  Are there any reasons why GP% could change?  Make sure you analyse whether the planned product or customer mix in the next year will impact GP.

Don’t forget tax paymentsLarge tax payments such as VAT and corporation tax payments are all too often forgotten in cashflow forecasts, so make sure they’re factored in!

Get some expertise and experience on the jobCashflow forecasting is something that takes time, experience and training to get right, so get someone with that training and expertise to help you

This is by no means an exhaustive list – every business is different, but these are some of the critical things that can have a serious impact on the accuracy of your cashflow forecasts.

As you refine your forecasts and get them more accurate, you’ll find that you’re able to take control of your business and your cashflow by taking action ahead of time every time, so you make it to the other side and hit the goal you were aiming for.