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A Beginners Guide To Cashflow Forecasting Part 3: Putting It All Together

Hi there! If you’re still with us, thank you for reading, and you’re now at the end of this mini-series on cashflow forecasting. If you haven’t read the first 2 parts of this series, you can find them here and here. Those parts cover working out what your income is and what your costs are, and how to balance the two properly. If you’re all caught up on that, let’s dive into the final instalment – how to bring it all together, and how to manage the out-of-the-ordinary cashflow scenarios.

 

Pulling It All Together

 

The good news is that if you’ve got here, you’ve already done most of the hard work. You’ve got all the numbers you need, and it should all look pretty organised. Everything you’ve written down should be able to be divided up into ‘inflows’ and ‘outflows’. So, at a very basic level, you will have:

Inflows

  • Product/service sales
  • Asset sales
  • Loan drawdown or other investment capital

Outflows

  • Operational costs and salaries
  • Cost of sales
  • Asset purchases
  • Loan repayments
  • VAT

 

If you do some basic maths, add all of that together and subtract one by the other, you should have a forecast of the balance in your bank account at the end of each month. In other words, the makings of a cashflow forecast. Many businesses will opt to use a spreadsheet to manage their cashflow forecasts, and since this is the most accessible thing to use, we’ll go through a basic guide to setting one up. First things first, open up Excel (didn’t I say this was basic?). Then:

  • In a new spreadsheet, set up the months as column headers along the top.
  • Add a total column at the end of each year.
  • Setup rows for your inflows and outflows, with separation between the two so they don’t get muddled.
  • Break them down into individual rows as described earlier in this article.
  • Add a total at the bottom of Inflows and a total at the bottom of outflows.
  • Add a total at the bottom of the entire report which calculates the net of Inflows – outflows.
  • Create a cash flow chart using the totals to visualise your forecast. This last one is optional, but having a chart can really help some people understand the data better.

Of course, if you’re not great with numbers, don’t like spreadsheets or just think all of this sounds like too much work (we wouldn’t blame you) then there is an alternative. You could use a bespoke accounting service, like us. At Deerbridge, we specialise not just in creating cashflow forecasts for your business, but helping you understand what they mean as well. So we won’t just present you with a forecast – we will go through every element with you and explain what it all means, and what you can do with that information. Whether that’s cutting costs in a particular area or expanding your services into a high-demand area, we can make sure you use your business data to make sound business decisions.

 

Seasonal Forecasting

 

Now this is the tricky part. Most businesses will have seasonal ups and downs – periods when you are very busy, or when customers just seem to dry up. And there are also businesses who work exclusively in the seasonal space – like gifts, which are most popular around Christmas, Easter, summer holidays and Valentine’s day. This kind of business will be extremely busy for 10% of the year, and then have a big lull for the other 90%. That can make staying positive for that 90% very difficult, especially when it comes to cashflow. Even for businesses who aren’t in that space exclusively, seasonal peaks and troughs can cause all sorts of issues. But there are some techniques that many seasonal businesses will employ to manage their cash flow through these tougher times:

  • Find alternative business options or activities for the slower part of the year.
  • Hire employees only during the busy times and lay them off when the season ends.
  • Develop banking relationships that allow for the extra flexibility required.
  • Close their doors and reopen the next year for the busy season.
  • Save part of the earnings during the busy time to cover expenses during the slower part of the year.
  • Arrange for vendor relationships that allow them to make larger payments when cash flow is high and lower payments during slower times of the year.
  • Find ways to create off-season demand through partnerships with other businesses, by offering deals to local customers, or by moving sales online.

On top of all that, seasonal businesses need to spend a lot of time monitoring and nurturing their cashflow. These businesses often develop monthly sales spending and cashflow forecasts, with sales forecasts being built entirely on the cash flow forecasts. Cashflow will become the managing driver behind spending, and changes will be carefully monitored. If you’re going down the route of shutting down for a large section of the year, your job actually becomes a little easier – since you don’t need to estimate fluctuating year-round costs.

 

And to be honest – that’s all there is to it! The process of creating a cashflow forecast is actually quite simple, it’s what you do with it that’s more complicated. Once you have your cashflow forecast done, you need to understand what it means, and how to use it to improve your business. That’s where we can help. If you would like to find out more about creating or using your cashflow forecast, just get in touch with me today for your free consultation.