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Unlock This CourseCash flow forecasting is like planning your pocket money for the next few months. You need to know how much money you'll have at the start of each month and how much you'll have left at the end. For businesses, this planning is absolutely crucial - it's the difference between success and failure.
A cash flow forecast shows how much money a business expects to receive and pay out over a specific period. The opening and closing balances are the bookends of this forecast - they tell you where you start and where you finish each month.
Key Definitions:
The opening balance is your starting point. For the very first month of your forecast, this is the actual cash you have in the bank right now. For every month after that, the opening balance is always the same as the previous month's closing balance. Think of it like a relay race - the baton gets passed from one month to the next!
Understanding the relationship between opening and closing balances is fundamental to cash flow management. It's a simple but powerful concept that helps businesses plan ahead and avoid running out of money.
Every month in your cash flow forecast follows the same pattern. You start with an opening balance, add all the money coming in (receipts), subtract all the money going out (payments) and you're left with your closing balance.
Start with the cash you have at the beginning of the month. For January, this might be £5,000 in the bank.
Add all money coming in during the month - sales, loans, investments. If you receive £8,000, your running total is £13,000.
Subtract all money going out - rent, wages, supplies. If you pay out £9,000, your closing balance is £4,000.
Sarah runs a small bakery and creates a 3-month cash flow forecast. In January, she starts with £3,000 (opening balance). She receives £12,000 from sales but pays out £10,000 for ingredients, rent and wages. Her closing balance is £5,000. This £5,000 automatically becomes February's opening balance. In February, she receives £14,000 but pays out £11,000, leaving her with £8,000. This pattern continues, helping Sarah plan when she might need extra funding or when she'll have surplus cash to invest.
The basic formula for cash flow is surprisingly simple, but it's the foundation of all business financial planning. Once you understand this formula, you can predict your business's financial future.
Closing Balance = Opening Balance + Total Receipts - Total Payments
This formula works for any time period - a week, a month, or a year. The key is being consistent with your time periods and making sure you don't miss any receipts or payments.
March Forecast for Tom's Car Wash:
Opening Balance: £2,500
Receipts: £6,000 (from customers)
Payments: £4,200 (wages, supplies, rent)
Closing Balance: £2,500 + £6,000 - £4,200 = £4,300
These balances aren't just numbers on a spreadsheet - they're vital signs of your business's health. They tell you whether you're heading for trouble or success and they help you make important decisions about spending, borrowing and investing.
By looking at your projected closing balances, you can see potential problems months before they happen. If your closing balance is getting smaller each month, or worse, going negative, you need to take action quickly.
Closing balances that keep getting smaller, negative balances, or balances that are too close to zero for comfort.
Increase sales, reduce costs, delay payments to suppliers, or arrange additional funding from the bank.
Early warning gives you time to fix problems before they become crises that could close your business.
Ice cream van operator Mike notices his cash flow forecast shows closing balances dropping from £8,000 in September to £2,000 in December, then £500 in January. This early warning helps him plan to take on winter work delivering newspapers, arrange a small loan, or reduce his winter expenses. Without this forecast, he might have run out of money completely and lost his business.
Even experienced business owners make mistakes with cash flow forecasting. Learning about these common errors can save your business from serious financial problems.
The most dangerous mistakes happen when people are too optimistic about money coming in or too relaxed about money going out. Remember, it's better to be pleasantly surprised than horribly shocked!
• Forgetting that closing balance = next month's opening balance
• Being too optimistic about sales
• Forgetting about seasonal variations
• Not including all expenses
• Assuming customers pay immediately
Creating accurate cash flow forecasts takes practice, but these tips will help you avoid the most common pitfalls and create forecasts that actually help your business succeed.
Always be conservative with your estimates. It's better to have more money than expected than to run out when you need it most. Update your forecasts regularly as new information becomes available.
Use actual historical data where possible. Don't just guess - look at what really happened in previous months.
Customers don't always pay on time. Build in realistic payment delays to avoid nasty surprises.
Start with basic forecasts and add complexity gradually. A simple forecast that you actually use is better than a complex one you ignore.
Restaurant owner Priya used cash flow forecasting to plan for the quiet January period after Christmas. Her forecast showed closing balances dropping from £15,000 in December to just £3,000 in January. She used this information to negotiate extended payment terms with suppliers and arrange a temporary overdraft. When January came, she was prepared and kept her restaurant running smoothly while competitors struggled with cash shortages.
Modern businesses don't need to do cash flow forecasting with pen and paper. Simple spreadsheet programs or specialised business software can make the process much easier and more accurate.
Most spreadsheet programs have built-in templates for cash flow forecasting. These automatically calculate your closing balances and carry them forward as opening balances for the next period. This reduces errors and saves time.