Step #12 of my Top 20 Tips for Small Business Start Ups is the one that separates businesses that survive from those that don't. As your business starts to take shape and you get more edgy about leaving the day job, you need to know how much money will actually be in your bank account, and when.
Cash flow sounds like jargon, so let's keep it simple. Cash flow is the money coming into your business and going out of it, and when it happens. It's not the same as profit, and so don’t mix the two up.
Profit vs cash: why they're different
A business can be profitable on paper and still run out of money (in other words have poor cashflow). Here's a made-up example. Imagine you start with £1,500 in the bank. You invoice £2,000 a month, your customers take 30 days to pay, and your costs are £1,200 a month, which you need to pay straight away each month.
On paper, you made £800 profit in month 1. In reality, your bank balance fell by £1,200. Now imagine one customer pays three weeks late in month 2, or you have an unexpected £500 bill. That £300 cushion would vanish. This is why forecasting and keeping track of your cashflow matters.
How to build a cash flow forecast
You don't need to be a spreadsheet wizard. Start with a free template. Start Up Loans offers a cash flow forecast template with a separate tab of guidance and hover-over tips, plus a personal survival budget template to go alongside it. Here's the process:
1. Start with your opening balance. How much cash do you have in the bank (including your start-up money) at the start of month 1?
2. Forecast your sales, month by month. Use your research from Steps #2 and #4. Refer to that business plan you wrote. Be cautious rather than optimistic.
3. Record when the money actually arrives. Not when you invoice, but when you're paid. If customers take 30 days, your income lands a month later.
4. List your one-off costs. Equipment, branding, website, insurance, licences and so on.
5. List your regular costs. Software, phone, insurance, travel, stock, marketing and any loan repayments.
6. Don't forget the sneaky ones. Tax, VAT (if you're registered) and your own pay. Set aside tax as you go, as we covered in Step #10.
7. Work out the closing balance for each month. Opening balance, plus cash in, minus cash out.
8. Spot the low points. Where does your balance dip? When will you need extra cash, a cheaper supplier or a more generous payment deadline?
A forecast for the first 12 months is plenty to start with.
Test it with "what if?"
Once you have your forecast, stress-test it:
• What if sales are 20% lower than you expect?
• What if your biggest customer pays a month late?
• What if costs are higher than quoted?
• What if you're ill for two weeks?
If any of those would leave you broke, build in a bigger buffer, or find ways to reduce the risk.
How to keep cash coming in
Once you're trading, these habits make a huge difference:
• Invoice promptly. The day you finish the job, not the end of the month.
• Make it easy to pay. Put your bank details, payment links and due date clearly on invoices.
• Ask for deposits or stage payments on bigger jobs. Request a percentage on starting the contract and the remainder on completion.
• Agree payment terms upfront. Put them in writing so there’s no quibbling about not knowing.
• Chase politely but quickly. A friendly reminder the day after the due date is normal business, not rudeness.
• Know your rights. GOV.UK explains that you can claim interest and debt recovery costs when another business pays you late. If you agree a payment date, it must usually be within 60 days for business transactions (30 days for public authorities). If you don't agree one, the law says a payment is late 30 days after the customer gets the invoice or you deliver the goods or services, whichever is later.
Look after the money going out
• Negotiate payment terms with suppliers where you can.
• Avoid paying for things too early, including annual subscriptions you could pay monthly.
• Keep a tax pot so your tax bill is never a nasty shock.
• Check your spending every month and cancel what you don't need.
Review it monthly
A forecast is only useful if you compare it with what actually happened. Once a month, add your real figures, see where you were off and adjust the next few months. Over time you'll get much better at predicting.
Why this matters for the day job decision
This ties back to Step #3. Your forecast, along with your personal survival budget, tells you when your business can realistically replace your salary. It also underpins any funding application (Step #13), because lenders will want to see that you understand your numbers.
Where to start from here
Don't panic, you don't have to do everything today!
• ☐ Download the cash flow forecast template
• ☐ Fill in your opening balance and your known costs
• ☐ Forecast the first three months of sales cautiously
• ☐ Run one "what if?" scenario
• ☐ Put a monthly forecast review in your diary
Feeling nervous about the numbers?
You're not alone, and a bit of nervousness is healthy. If you'd like to talk through how your forecast fits your marketing and growth plans, book a call with me.
Next up in the series: Step #13, What Are Your Funding Options? Loans, grants and where to find them.
