5 Steps To Create Cash Flow For Your Business:

Cash is running low but you are not sure how long you can survive for?

Are you worried that you will not be able to afford paying wages next month?

Cash is the fuel that keeps businesses going and without it your business will fail to pay wages, suppliers, tax etc. and simply will not survive. Therefore, cashflow forecast is one of the most fundamental tools that business owners have and without it running a business can be very difficult.

So where to start and how to go about creating cash flow template?

Here are some five steps which will assist you to create your monthly cash flow projection using Excel spreadsheet.

Step 1 (Bank Balance):

Start with the balance you have in your bank account, this will be your starting point. If you starting a new business then this figure will probably be the amount of cash you introduce to the business (capital).

Step 2 (Income):

Unless you are using Factoring or similar credit arrangement, most small businesses have two types of income: Cash Sales (where money received straight away once you issue your sale invoice) and Credit Sale (where you allow your customers to pay within a certain period).
Run through your current outstanding sale invoices and slot them in the relevant month under your income (allowing for the credit period you are allowing your customers). Now if you are aware of one particular client who is always late paying you no matter how hard you try to obtain the money earlier – make sure this is reflected in your cash flow.
For any recurring business (for example monthly retainers), enter those amounts under each month they are due.
Tip: The key to get this step right is to always underestimate your income. Why? Well… over the years we have seen too many cash flow forecasts that present such an optimistic picture with very healthy bank balance projected at the end of the financial year. In reality – customers don’t always pay on time (and sometimes don’t pay at all), Firm orders don’t get fulfilled, recession, unsuccessful tenders and many other reasons. Therefore – be realistic in your income projection as if it seems too good to be true, it probably is.

Step 3 (Fixed costs):

Fixed expenses are those which do not change every month. For example, your rent, electricity bill, business rates, broadband etc.
Tip: a great place to start looking for fixed expenses is your bank account – look for Standing Orders and Direct Debits which are coming out of your bank account and slot them in your monthly cash flow forecast.

Step 4 (Variable costs):

If in step 4 we covered those outgoings which do not significantly change every month. Now we are looking for the expenses that fluctuate from month to month. For example: commission paid – this will increase or decrease according to the level of sales made in a specific month. Other examples may include one off costs such as website, solicitors, investments, recruitment costs and annual costs which are not paid through a Direct Debit or Standing Order such as corporation tax.
Tip: Look at historical data and work out an average for every variable cost. Also, try to project to the best of your knowledge when the one off costs will take place using known deadlines such as VAT liability, subscriptions renewals, insurance etc.
See how this is all taking shape? Great! Let’s move to Step 5 and we are done.

Step 5 (Tidy it all up):

Make sure you keep track on the projected bank balance at the beginning and end of every month. This is easily done on Excel by the following formula:
Opening bank balance (Step 1) plus total monthly income (Step 2) less total outgoings (Steps 3&4).
Double check all the formulas, ensure you included VAT throughout all stages, add some pretty colours and you have now created yourself your cash flow projection.
Remember, a good cash flow forecast must be monitored and adjusted all the time otherwise it is going to be out of date and become irrelevant.
Once you master your cash flow projection you could also create “what if” scenarios such as “How much cash will I have if income was reduced by 15%” or “what will be the effect on the cash balance if I were to increase wages by 20%”.