Prepare a cash flow forecast

Set up the forecast

Lenders usually ask to see one, and it also tells you whether you can afford to start. Use one column for each month of your first year, because that is when timing gaps show most.

For the first month, the opening balance is the cash in your business account when you start trading: your own savings, plus any loan, grant or investment you have already received.

Enter money coming in when it arrives

Put each receipt in the month the money reaches your account, not the month you make the sale. If you invoice a customer in January and they pay in February, the cash goes in February.

Sales paid for at the till or online arrive straight away. Invoiced sales arrive after your payment terms, and some customers pay later than that, so build in a delay and be cautious about it. Count a loan or investment in the month you expect to receive it, and a grant only when you are confident of the payment date, not when you apply.

Show sales as the full amount the customer pays. If you are VAT-registered, that includes the VAT you charge, which you must pass on to HMRC.

Enter money going out when you pay it

List every payment that leaves your account, including those that never appear in your profit: stock and materials, wages with the PAYE and National Insurance due on them, employer pension contributions, rent and utilities, insurance, professional fees, marketing, equipment, and the capital as well as the interest on any loan.

Tax payments are the ones most often missed, and each falls on its own date.

A VAT Return and its payment are usually due one calendar month and 7 days after the end of each 3-month accounting period.

A sole trader or partner pays Income Tax and Class 4 National Insurance through Self Assessment on 31 January, and may also have payments on account.

Payments on account are the cause of many second-year shortfalls, because the 31 January payment can include a balancing payment and the first payment on account together. Add them to the January and July columns from your second year.

If you are VAT-registered, your VAT Return will normally include the VAT you charged on sales you have not yet been paid for. The Cash Accounting Scheme changes the timing.

Find the funding gaps

Look down the closing balances. A negative balance means you run out of money that month. A positive balance that is small compared with a month's outgoings is a gap waiting to happen, because one late customer would tip you into overdraft.

Close each gap before you start. You can put in more of your own money, arrange an overdraft or loan, delay a purchase until cash is stronger, take deposits or stage payments on larger jobs, or agree shorter payment terms with customers and longer terms with suppliers. Then update the forecast and check every month again.

Test it and keep it current

Base your sales on evidence, such as orders, customers you have spoken to, or comparable businesses, and write down each assumption so a lender can see where the figures come from. Run a cautious version in which sales are lower and customers pay later to see how much cash you need to survive it.

Once you are trading, replace each forecast month with the real bank figures and extend the forecast forward. The differences show you where your assumptions were wrong.