To survive as a business you need to forecast. Forecast is about making a reasonable estimate of future sales, costs and cash balances. It will enable you to discuss with a lender (should you need to raise finance), how much you will need to borrow and for how long. It is therefore important to make your forecast realistic.

There are three forecasts you need to make: cash flow, profit and loss and balance sheet.

1. Cash Flow Forecast
A cash flow forecast is the expected flow of money coming in and going out of the business. Ideally, the two must balance over a period of any length. The cash flow does not tell you if you are making a profit, instead it lets you know whether or not you have any money.

The monthly cash flow is usually drafted with the twelve months of the year across the top of the page starting with the month that begins your financial year. Down the left hand side are a list of categories of income and expenditure consisting of the opening bank balance (actual amount in your business bank account) and is divided into the following:

Receipts - this would include items such as cash from sales, debtors, VAT (net receipts), sales of assets, other receipts and capital.

Total Receipts - this is the total figure of the above.

Payments - this would include items such as payment to suppliers, cash purchases, wages and drawings, VAT (net payments), rent, heating, lighting, telephone, bank interest and so on.

Total payments - this is the total figure of the above.

Closing bank balance - this is calculated by adding the opening bank balance to the total receipts and subtracting the total payments figure. The closing bank balance them become the opening bank balance at the start of the next period.

2. Profit and Loss Forecast
A profit forecast is the amount of profit you expect to make at the end of the period. The monthly profit and loss forecast will consist of the following:

• Sales - This is the cash you receive during a period of time including what you are owed, minus what you were owed at the end of the previous period. You do not include the amount of VAT here as you do in the cashflow forecast.
• Cost of sales - This is the cost that you estimate will vary with the level of your sales. It will include items such as purchases (such as raw materials or items you buy to sell), labour (any employees who are directly involved with the manufacturing of your product) and other direct costs.
• Gross Profit - This is total cost of sales figure minus sales.
• Overheads - This is where you would list all the expenses involved in running the business, such as rent and rates, heating and lighting, telephone, drawings and so on.
• Total Overheads - This is the total sum of the above.
• Miscellaneous income - This is where you would put the estimate figure of any other income you might receive that is not from the sale of your product. For example, interest from money invested.
• Net Profit - The net profit figure is the gross profit plus the miscellaneous income minus the total overheads.

3 Balance Sheet Forecast
The Balance Sheet forecast is an estimate of what your business owe and own at a particular period of time. It consists of the following:

• Fixed Assets - This is items such as property, furniture, machinery, and fittings, vehicles that are acquired for use in the business over a prolonged period of time.
• Total Fixed Assets - This is the total figure of the above.
• Current Assets - These are mainly cash in hand and at the bank, stock (includes any raw materials or half-finished products not yet sold) and debtors (what the customers owe you).
• Total Current Assets - The total sum of the above.
• Total Assets - The total fixed assets plus the total current assets.

Capital and Liabilities

• Capital - This would be the money used to start your business. You would also put I the figure for profit and loss taken from your profit forecast. If you forecast a loss, you would need to put this in brackets and deduct from your capital.
• Liabilities - The liabilities of a business may be of two types: current liabilities such as overdrafts, tax payable (including VAT) and creditors (what you owe to your suppliers at the end of the period) and long tem liabilities such as loans.

The Working Capital is the value of the current assets of the business less the current liabilities. The Working Capital is essential to businesses, the lack of which is a common reason for business failure.

There are many useful sources that can help you draw up your forecasts, which include banks that usually provide the template for forecasts. Your accountant can also help you to produce the forecasts.

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