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Building Good Financial Habits With Cash Flow Forecasting

30 November 2023

The statistics are clear; 80% of small businesses go under due to cash flow problems, not lack of profit. Building business resilience with good financial habits can make all the difference. Cash flow forecasting is a good habit to get into and being proactive will reap rewards in terms of reducing stress for yourself and also ensuring your business has the cash it needs to operate well.  

As a small business, it can be hard to keep on top of financial management. When there are so many other things to attend to, it’s easy to put strategic future planning off to get through day-to-day work. However, regardless of how hard you work to get through the day, money will keep flowing in and out of your business, whether you are keeping an eye on it or not. Doing a cash flow forecast and reviewing it regularly can help you manage that cash future before it arrives.    

If you’re reading this in autumn or winter, it’s time to get into the office to plan the business year ahead. For those of you who have accounting year ends at the traditional time of the end of November, this is the time to do the end of year stock take, wrap up the old financial year. You will need to finalise your whole farm budget for the year ahead, and critically, to plan your cash flow forecast to identify the peaks and troughs in money coming in and flowing out of your business. This will allow you to plan and better prepare for the year ahead.   

Understanding the difference between cash and profit

A positive bank balance is not the same as profit. Profit is what is left after the subtraction of all costs from the total income within a business, but a positive cash position is just that, cash at hand in the bank at any one time. Understanding your cash position at different times of the year is essential to be able to manage your business proactively. This is called cash flow forecasting. 

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The benefits of cash flow forecasting

Cash flow forecasting will help your business to:  

  1. Confirm you can maintain your business operations over the time period you choose to forecast for. 
  2. Avoid unauthorised overdraft fees and allow you to see when you may need to discuss short term increases in an overdraft with your lender. 
  3. Consider the impact of possible future prices on your cash position at any time during the year. 

This last point will support decision making and help you see whether you need to increase your output or reduce your costs. It will also help you see when you can build the case for investment of cash surplus back into your business. Moreover, it will help you identify what your cash needs are for the year and make provision for that.  

Getting started with cash flow forecasting

To build a 1-year cash flow forecast you need:  

  • Your opening bank balance. 
  • Your bank statements showing your receipts and payments into and out of your business for that last accounting year. 

And / Or your accounts nominal ledger showing your receipts and invoices for the previous year on the dates they are paid from your bank account.   

  • A tool or spreadsheet to do the sums on a monthly or weekly basis.   

Start by laying out your monthly sales planning  - what gets sold and when, month by month. Update your sales prices from the previous year based on your best available knowledge of what the market is doing now. This can make a big difference.  

Then lay out your expenses on a monthly basis. Include them all: 

  • Significant one-off big expenditures, e.g., the annual insurance bill. 
  • Personal drawings. 
  • Allow for operating costs on machinery repairs, drainage, fencing, fuel, energy, wages, feeding, fertiliser. In short, all your weekly or monthly bills. 
  • All standing orders and direct debits. 
  • HP / loan repayments.  
  • Replacement of any vehicles, machinery, or other equipment at the time you wish to buy it. 

It’s important to remember that whatever you do will not be perfect. Budgeting is always a work in progress, and the information you get out of it is only as good as what you put into it. You will need to revisit your cash flow budget regularly to update it with your current position, check your progress against your expectations and adjust your forecast to factor in anything unexpected.  

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If money is tight, you may even need to move to reviewing cash flow on a weekly or daily basis. Monitor it regularly using your recent transactions to get you through a tight spot.  

Remember you can ask for help. Get your local advisor or an accountant to support you to do this and get the most out of it.  

Further information

If you’d like to go into this in more detail we would recommend watching this webinar on budgeting and healthy business practice.  

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