When you work for yourself, you may wonder why you would bother putting together a cash flow forecast. After all, you’ve most likely got a good grasp of what’s coming in and going out of your business.
However, a good forecasting exercise isn’t merely about looking at the facts, it’s also a chance to ask ‘what if?’
Ultimately, this allows you to look at different scenarios and test the impact, enabling you to see more clearly how you would be affected by any changes in income or expenditure.
With Coronavirus causing so much uncertainty, now is a very good time to do a forecasting exercise. It doesn’t need to be difficult or onerous. Hopefully, these simple steps will help you.
A financial forecast attempts to make an accurate prediction of the future of a business. It’s different from a budget in that it doesn’t look at the money you’ve got and how you’ll spend it.
A forecast looks at what income you’re likely to generate and is usually based on past performance and how you anticipate being affected by market factors outside of your control. It’s a useful document for planning ahead, being prepared, and safeguarding your business through good times and bad.
Before you begin, you’ll need to have your up-to-date financial records such as your income statement, cash flow statement and balance sheet to hand.
You can also download a cash flow forecast template from FreeAgent, our online accounting software partner.
A good forecasting exercise isn’t merely about looking at the facts, it’s also a chance to ask ‘what if?’ Ultimately, this allows you to look at different scenarios and test the impact, enabling you to see more clearly how you would be affected by any changes in income or expenditure.
With Coronavirus causing so much uncertainty, now is a very good time to do a forecasting exercise.
Expenses are usually more predictable than income, so start by getting to grips with all of the costs such as utilities, insurance, broadband, phones, stationery, software subscriptions.
Map out which costs are fixed and which could fluctuate if you bring in more work. Remember to think about one-off costs such as the replacement of any ageing IT equipment.
If you’re a Clever Accounts customer, you can use the online portal to help predict and track your expenses. You can also use a simple spreadsheet to map out the expenses you expect to incur.
Make a realistic assessment of your income. Not only will this help you decide if this is where you need to be, but it will also help you look at how solid your income is.
Equally, where might your income grow and how might this increase your operating costs?
Ensuring you are clear on how you would be affected by different scenarios will help you look at the journey you need to take to achieve your goals.
Example
if you plan to double your income in the next 12 months, where do you need to be in three months/six months or nine months? Will you be able to make gradual increases to sales, or is there something that’s happening that will enable you to achieve rapid growth?
Do bear in mind that growth is usually accompanied by increased cost, so remember to map that into your forecast.
Don’t be tempted to make your document too futuristic. Keep it grounded in reality looking 12 – 24 months ahead.
Review your forecast regularly, ideally at the end of each month but otherwise at the end of each quarter. Use your actual figures for that period to tweak the forecast to ensure it is always up-to-date.
You’ll also find you get better at forecasting by looking at your financial records more regularly.
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