Cashflow forecasting

Cashflow forecasting

Let’s start with the basics. Every business relies on good cashflow. Without sufficient money coming in, there simply won’t be the funds to pay staff, suppliers and other bills. Cash can come from sales or finance, but ultimately you’ll have to repay finance.

Cashflow is like having water on tap. You may be able to cope if it slows to a trickle for a while, but not if it comes to a stop.

Over the last year, many businesses have found their cashflow under immense pressure. However using a cashflow forecast can provide early warning of problems. They also allow you check how much impact changes will have before you make them.

What is a cashflow forecast?

A cashflow forecast simply looks at the cash you have available, the things you’ll need cash for, and the cash you’ll have afterwards.

Cashflow forecasts usually provide a weekly or monthly overview.

(It’s possible to forecast daily, but much too time-consuming, and most businesses have some flexibility over when they make payments over the course of a week).

Your cashflow forecast should include:

  • Opening Balance

  • Cash In (from sales and any other sources)

  • Cash Out (cost of sales, wages, PAYE, VAT, overheads such as rent, software, marketing and accountancy costs, plus loan repayments and interest payments)

  • Closing Balance

Your forecast will show the closing balance over time.

Why do I need a cashflow forecast?

Use your forecast to:

  • check your bank account won’t go overdrawn or exceed your overdraft facility

  • check if you can repay borrowing such as directors loans

  • see what happens if you make changes to the business such as increasing sales or taking on new staff

  • model the effect of improving credit control and getting paid earlier by your customers

  • work out how much finance you need to make changes to your business.

What can I do in Xero?

Xero has some basic features which will provide an insight into your cashflow. These include:

How can I create a cashflow forecast?

You can create a simple forecast using a spreadsheet. The problem with spreadsheets, however, is that:

  • they’re not connected to your accounts software

  • it takes a lot of work to keep them up-to-date

  • it’s easy to make mistakes.

However apps come with their own challenges. Some apps:

  • require you to refresh your Xero connection each time you use it

  • only predict cash in, not cash out

  • fail to take account of periodic expenses such as VAT

  • make predictions based on the data without knowing what influences these sales / costs lines.

Forecasts are only as good as the data they are built with, and are only predictions. However a big advantage of using an app is you can test and compare different scenarios.

We’ve partnered with Fluidly

Having reviewed cashflow apps available in the Xero App Marketplace, we are currently recommending Fluidly.Graphic says 'Fluidly: we've partnered with Fluidly! Intelligent Cashflow" and shows a swimmer

We can invite clients to a free ‘lite’ version of Fluidly, and if you feel you’d benefit from it, a full subscription.

If you’d like to improve your cashflow, get in touch or book your review:

Book your Business & Xero Review

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