Cashflow Forecasting

A cashflow forecast simply looks at the cash you have available, and more importantly where there maybe a cash shortfall.

Cashflow forecasts are usually produced with 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.

Use your forecast to:

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

• ensure you can repay current debts and borrowings such as creditors, bank loans etc.

• use scenerios to see how changes to the business such as increasing sales or taking on new staff will impact cash

• 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, or to plug any gaps in available cash

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

• a 7 to 30 day short term cashflow report (go to Business > Short-term cashflow)

• cash in-out graph on the dashboard

• the ability to keep track of upcoming income / expenditure:

  • expected payment dates for invoices and

  • planned payment dates for bills

Xero Analytics Plus has additional features, including the ability to look at a 60 or 90 day cashflow, and custom reporting dates. Learn more about Xero Analytics Plus.

You can create a simple forecast using a spreadsheet. Here's an example.

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.

Unfortunately there are very limited options for businesses using invoice finance.