A Beginner’s Guide To Cashflow Forecasting – Part 3

Welcome to part 3 of our 4-part series, where we’re taking a deep dive into the world of cash flow forecasting. We’re doing this for 2 reasons. First, for any start-ups reading that need a bit of help getting their head around the subject, and two, for any established business that’s managed to never put one together. There’s a surprising number of businesses that have gone from start-up to large business without any form of cash flow forecasting, and they often end up in a mess sooner or later. We’ve covered forecasting your sales, so today’s instalment is all about forecasting your costs.

Forecasting Your Costs

This is the bit that will probably make you cringe, especially if you’re an established business. But now it’s time to write down everything your business spends during the time you’re forecasting for. The process for this is basically the same as with your sales forecast, but instead of filling in what you expect to sell, fill in what you expect to spend. No payment is too small to be listed. Some examples of payments you may need to include are:

• Rent
• Salaries
• Insurance
• Buying stock
• Equipment

This can actually be a really helpful exercise, as you can catch some expenses you don’t need/want to pay anymore and save some money!

These costs can then all be sorted into their respective groups. So there might be 8 or 9 expenses that are all part of your cost of sale, while 4 are one-off equipment purchases and some are your annual insurance payments. If you’re not sure where things go, here are a few tips:

The Cost of Sales: The things that are directly attributable to the production of the goods or services you sell. The list is much bigger for products than services, and should include things like materials cost, direct labour costs for making the product, and any payments on machinery. The key thing here is timing – if you buy stock a month in advance or only when an order comes in, you need to have it noted in the right place to accurately forecast your cash flow.

Operational Costs: Fixed outgoings that keep your business going. Rent, phone lines, internet connections, utility bills and any other day-to-day running costs for your business. They are known quantities with a set schedule for payment (hopefully), so this part should be fairly simple to put together.

Assets: This is all of the ‘things’ that you need to run your business. Computers, plant machinery, vans. Anything that retains a value after the initial purchase is classed as an asset. You physically own these things, usually for long periods of time. Separating these out is useful because they’re usually big sums of money, so you can see the impact on your cash flow.

Loans and Repayments

If you’ve taken out a loan or other form of funding, then you probably have a monthly repayment to make. This is an interesting one, because accountants will tell you to put it in slightly different places. We prefer to put it as a separate line item in your costings, so that you know where the money is going and what it’s for. This is especially important if you take out a business loan. The initial payment injects cash into the business (which needs to be accounted for), and then the repayments and interest are taken into account. The specifics will depend on how your loan is structured, so we can’t go into too much detail, but it is something you need to think about.

Don’t Forget VAT!

There’s one more cost you need to think about that a lot of businesses forget to budget for. VAT. If your business is VAT registered, you’ll be presented once a year with a nice big VAT bill to pay. Which, if you haven’t planned and budgeted for it, can really impact your profitability and potentially land you in serious trouble.

Being VAT registered means you’re collecting 20% more money from your customers, which will just go into your bank account along with everything else. But at some point in the year, that money will need to go back out to pay your VAT bill. So you need to account for it, and ideally set money aside for it. A good tip from accountants is to create a separate savings account just for VAT and put money aside for it each month, so you’re not caught short. This also makes it much easier to forecast your cashflow, since you can account for it as a set cost each month.

Don’t forget, as of April 2026, when Making Tax Digital comes into force, you’ll actually get 4 VAT bills a year (1 a quarter). So you’ll need to make sure you’ve got that money saved up in time for each.

Putting all of this together, you should now have a good idea of what it costs to run your business, and therefore how much you need to make if you want to break even.

That’s it for today. Next month, we’ll be bringing you the final instalment in this series, where we talk about seasonal cash flow challenges and how to tie all of that information together into a single cashflow forecast. In the meantime, if you need any help improving your cash flow by getting clients to pay on time, just get in touch with our team at Debtcol today.