How to do a cash flow forecast for your trade business

Keep reading to find out how to do a cash flow forecast for your trade business and plan its future.

By doing a cash flow for your trade business, you can see what money you can expect to be in your business. You can see how financially strong you are or where you need more cash.

That way, you can plan for your future, whether it's getting more cash or how to invest in your business to grow.

What is a cash flow forecast?

The definition of a cash flow forecast is a way of estimating the flow of money in your trade business. The forecast will cover a set period.

By cash, we mean actual notes and coins in your pocket and in bank accounts.

It’s a way of trying to match money in with money out. By predicting when you are likely to receive income, you can better plan your business payments.

A cash flow forecast aims to help smooth this process. That way, you’re less likely to hit financial difficulties due to a lack of cash.

Manage your finances better

Small businesses can benefit from having a cash flow forecast as much as larger ones. The cash flow forecast is a very useful tool for managing your finances better.

Keeping a careful eye on cash movements could be the difference between success and failure.

Simple tips for how to manage cash flow

Understanding cash flow management Whether you’re an experienced business owner or just starting out, you can't ignore cash flow management. A small trade business needs to manage cash flow because every penny counts. Larger national and regional businesses face bigger movements of cash. That can

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What are the advantages of a cash flow forecast?

As the definition of a cash flow forecast says, it’s about knowing what’s going on financially, make sure you know how to avoid common cash flow problems, and check you know how to improve cash flow.

How to improve cash flow for trade businesses

What keeps tradespeople awake at night? Worrying about getting paid on time and settling your bills is probably a contender. Often, it all comes down to cash flow. Poor cash flow can quickly bring down even a successful business. Keep in control It doesn't matter whether you're a small or large

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Here are some of the main advantages of a cash flow forecast:

• Make better financial decisions

• Control the flow of money into and out of your business

• Early warning that your cash levels may be low, so you can act like requesting a bank loan to die you over

• Ensure a cash buffer for unexpected costs

• Build your reputation for running a professional trade business that settles its bills on time

• Pay staff and contractors what you owe them on time

• Collect money owing to you on time

• Ensure a cash buffer for unexpected events

• Budget in advance for big expenses, like buying plant, machinery and vehicles

How to do a cash flow forecast

Here are some of the key steps:

Set a forecasting period

Match this to the financial pattern of your income. Many businesses run monthly cash flow forecasts. However, you might prefer to do them weekly or even daily.

Typical cash flow forecast periods can be:

• Short-term – one month

• Medium-term – one month to one year

• Long-term – one to five years

You gradually build a picture of your business’s financial health with every forecast. The more forecasts you do, the more accurate your cacluations should be in future.

Update your cash flow forecast regularly

Make sure you regularly update your cash flow forecast. For example, if you receive unexcepted income or a large bill.

Keep it accurate

Avoid putting inaccurate figures in your forecast. It will probably generate poor-quality information. That can make it hard for you to produce realistic forecasts.

Sometimes you might have to make ‘guestimates’. In this case, err on the side of caution. Entering high amounts for expected income can muck up your forecast if the money doesn't come in. It could even make the cash flow negative.

Estimate incoming money

This could include:

• Sales – what you expect to earn over the forecast period

• Credit – if you offer customers delayed payment terms you can plan this into your forecast

• Refunds – anything due back to you

• Interest earned on bank accounts over the forecast period

Estimate outgoing money

This could include a range of business expenses:

• Staff and contractor costs

• Materials

• Building costs – energy, water, rent, rates

• Vehicles costs - buying and running vans or other vehicles

• Advertising and marketing costs

• Plant, machinery, tools and equipment

• Loans – if you borrow money from a bank or other sources

• Tax bills

• VAT (if you're registered for VAT)

How to work out the closing balance on a cash flow forecast

Here’s how to work out the closing balance on a cash flow forecast:

• Step one:

Take the opening balance for the period that the cash flow forecast covers. This will be the closing balance from the previous period.

• Step two:

Add your net cash flow over the period to your opening balance. The net cash flow is the difference between incoming and outgoing money.

The resulting figure is the closing balance on your cash flow forecast. It will then be the opening balance for your next forecast.

This will be either:

• Positive cash flow (money left over)

• Negative cash flow (not enough money)

Software for creating a cash flow forecast

How do I create a cash flow forecast in Excel?

An Excel spreadsheet is a good place to create a cash flow forecast. Excel is usually included in Microsoft 365 software packages. You may already have it installed on your computer.

As with most software, it’s probably a question of learning as you go along. Look online for free guides to using Excel. They can usually point you in the right direction.

Can QuickBooks forecast cash flow?

You can buy specialist accounting software that includes cash flow forecasting. One of these is QuickBooks.

With QuickBooks, you can view two years of business transactions. You can also run up-to-the-minute cash flow reports. This helps you to track income and outgoings on jobs and projects.

Checkatrade members can receive 75% off QuickBooks business software.

Checkatrade members can save 75% on the first 12 months of QuickBooks Software*

As well as your tools, workwear and vehicles, the support you get for your trade business can make a big difference to your success. QuickBooks Software is designed for accounting and bookkeeping, helping you stay on top of your finances. With Checkatrade, you can make great savings on that too! We

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Cash flow forecast example

Cash flow forecasting will show you the peaks and troughs in the flow of income in your business. Use to avoid situations that give rise to negative cash flow.

Here’s a cash flow forecast example:

1. Opening balance (the amount carried over from the previous forecast): £1,000

2. Incoming money during the forecast period: £4,000

3. Outgoing money during the forecast period: £2,500

4. Net cash flow over the period: £4,000 minus £2,500 = £1,500

5. Closing balance on your cash flow forecast: £1,000 plus £1,500 = £2,500

Use an average when you don’t know the exact amounts

If you’re not sure exactly what your sales income will be from a customer over the forecast period, take an average.

For example:

• You do a monthly job for a customer that pays £100 each time. A monthly forecast would include £100

• You do a regular job for a customer but not every month. You can see from previous forecasts that they usually use you nine times a year.

Multiply £100 by nine (£900) and divide by 12. This gives you average incoming money of £75 to include in your monthly forecast

When you carry out your regular cash flow reviews, change the amounts you think the customer will use you more or less in the future.

Plan ahead to cover future expenses

This is a good way to make sure you have money ready to pay bills that will fall due in the future.

Here's an example for a monthly cash flow forecast:

• You know you’ll have a £600 bill payable four months from now

• Make a note to increase your expenses figure by £150 a month (although you're not actually paying this out)

• In four months, pay the £600 bill with the £600 you have put aside for this purpose

Compare your forecast with actual figures

To improve the accuracy of your cash flow forecast, check it against what actually happened. As we’ve said, a forecast doesn’t have to be set in stone.

By constantly adjusting your forecast you’re creating a more accurate picture of how your business is doing.

Find more leads to boost your cash flow

As well as our discount on QuickBooks cash flow reporting software, Checkatrade members also receive our help with new enquiries. There are lots of other benefits of Checkatrade membership too.

They include:

• Exclusive offers and discounts with suppliers like Tradepoint and Wickes

• Up to 20% off Public Liability Insurance

• Reduced cost of workwear and branding

• Guaranteed work when booked through us (T&Cs apply)

• Dedicated trades apps for job management and quoting/invoicing

What do you need to become Checkatrade approved?

Being a Checkatrade member comes with a whole host of benefits, but the biggest has to be gaining our seal of approval. You can then demonstrate your great reputation and win more business. That’s because homeowners trust tradespeople with the Checkatrade tick next to their name. It's a sign that

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FAQs

Why is a cash flow forecast important?

Once you understand what is a cash flow forecast you’ll see how it helps you plan future finances. Using it helps make sure you pay bills on time and should give you a better idea if you’re running out of money.

How can a cash flow forecast help a business to avoid insolvency?

A cash flow forecast can help you balance incoming and outgoing money from your business. That way, you reduce the risk of running out of money and becoming insolvent.

What does a cash flow forecast show?

It shows your cash balance at the end of the forecast period. By knowing how to work out a closing balance on a cash flow forecast you can estimate the flow of money and what you have left at the end.

How is a cash flow forecast calculated?

Start with your opening cash flow forecast balance. Add the amount of incoming money expected during the forecast period. Deduct outgoings over the same period. This gives you the closing balance on a cash flow forecast.