Cash forecasting for small businesses

One of the major reasons small businesses fail is due to fact that the money coming into the business is less than the cash going out. To anticipate problems in advance and know when cash is likely to be tight, it is important to prepare a forecast for your business and update it on a regular basis. Failure to prepare such a forecast leaves you at the mercy of events, and deprives you of the ability to make contingency plans – such as obtaining short-term loans or deferring planned expenditure – should sales be weaker, or costs higher, than expected.

Forecasts should be prepared on a regular basis and, at least for a small business or start-up, it is recommended this should be monthly, until such time as the cash flow has stabilised, or the business established itself (and even then regular forecasting should be a prudent course of action exercise for the wise business owner). The ideal situation is to have a rolling monthly forecast, with quarterly or even annual projections as well, although the further into the future  you are planning, the less detailed and more “big picture” your estimates will be.

Key elements of a cash flow forecast are:

  • Sales

Forecast sales for a period based on how much you actually expect to collect from your customers, not how much you are likely to invoice them. Accounts receivable are a problem for many small businesses, and late payment, or a failure to collect what is due, often puts cash flow under pressure. So be realistic and only include what you can reasonably expect to collect in the period.

  • Costs

Try and include as many costs as you can think of in your forecast. Whilst it is easy to think of the larger items, such as salaries, stock or equipment, it is equally easy to overlook some of the smaller expenses, such as monthly software subscriptions, or courier costs. Small items can mount-up, and, in the long run, amount to significant amounts so make sure you always include them.

Costs should be included on the basis of when money changes hands, not when they are invoiced. For example, if you have a monthly software subscription payable one month in arrears, the May 2017 cash flow forecast should include the April, not the May, subscription.

  • VAT

Irrespective of whether you are registered for VAT or not, your cash flow forecast should reflect receipts and payments inclusive of VAT, as these are the amounts that will actually be paid into, or out of, your bank account.

If you expect to have to make a VAT payment to your local revenue authority, then this should be included as a cash outflow in your forecast in the period when you are due to make the payment.

In terms of VAT refunds, care should be taken before including these in any cash flow forecast. In the first place, whilst revenue authorities are usually very happy to receive money from you, they are less willing to pay it out, so there may well be a long delay before you get any refund due! This is typically the case in Cyprus, for example. Secondly, the authorities may choose to challenge the amounts to be refunded, so don’t assume you will get back all the money you have claimed.

  • Other items to include in a cash flow forecast

A cash flow forecast should include all the cash that moves in or out of a business bank account, even if some of these items have little to do with the daily running of the operation. On the income side, apart from customer sales, this may include bank borrowings or loans from family members or friends. On the debit side, this will include taxes, bank loan or interest repayments, and money spent on new equipment – capital expenditure.


While preparing a cash flow forecast and keeping it up to date may seem a burdensome task for a small business owner, it is actually a very important way of measuring the health of your business, and making sure you will not only survive, but prosper, in the future. If you feel that preparing such a forecast is outside your comfort zone or core competence, hire an experienced financial consultant like AJD Consultants to set this up and maintain it for you. Not only will they help with the mechanics of the exercise but they can also help interpret it for you and identify likely problem areas.

Whatever course of action you take, don’t neglect this task. A well maintained cash flow forecast could be the difference between business survival or failure.

For more information on how AJD Consultants can help with the preparation and maintenance of your cash flow forecasts, please contact us for an informal discussion.




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