Cash flow is the lifeblood of your business.
You need to know whether you will have the cash in the bank at the right time to pay the bills, otherwise you could fail, even if your sales are good.
You can make a profit, but at the same time be cash-poor and have to borrow money. So, it’s important that you know what money you can expect to come in and go out of the business. Then, if things start to go wrong compared to your plan, you can take action to get things back on track.
Also, a growing business can use up more cash than it generates. So you need to make sure that you manage your cash flow and have a borrowing facility (for example, an overdraft) in place should you need to call on it.
The key to working out your cash flow is to understand when your customers will pay you, and when you need to pay your suppliers and your bills. Figures show up in the cash flow only when money is actually coming in or going out. So, if somebody owes you money, but you only expect them to pay after 30 or 60 days, the money goes into the cash flow forecast after 30 or 60 days, not when you invoice them.
Many business owners use a cash flow forecast to keep track of this movement of money in and out of the business.
We’ve provided a basic cash flow forecast Excel spreadsheet for you to download so that you can easily alter the figures, and all the calculations are built into the sheet for you. If you are not sure how to complete the sheet, you might like to watch the ‘How to’ video at the foot of this page, which tells you more about the various sections of the sheet.
At the bottom of your cash flow spreadsheet, where it says Closing balance, you will see your projected bank balance. If this figure shows as negative, then you either need to do things in a different way or arrange an overdraft or some other method of financing the shortfall.
Starting your business without committing figures to paper is very unwise. After all, unless you are going to make a profit and have a cash flow that sustains the business once you’ve got going — and allows you to live comfortably – there is little point in starting it in the first place.
More about the cash flow forecast
If you want to learn more about this vital tool for keeping track of the money in your business, you may like to listen to this audio file which explains why cash flow is important and gives you step-by-step instructions on how to complete a forecast for your business.
If you’d like to listen to the audio recording of this lesson again, click the play button:
You’ve thought about you, your business, your market and your money – so what’s next?
Finally, in Your future, you’ll be thinking about business planning and why it’s important and you’ll consider what steps you should take to start your business.