Finances

Cash Flow Forecasting for Freelancers: How to Ace It

With freelancing comes freedom, flexibility and an ability to control your work and time.

But the flip side is that it might be challenging to achieve financial stability all the time.  

When it comes to running a successful business, managing cash flow is one of the most important aspects of your financial health. Without proper cash flow management, your business could suffer due to a lack of funds.

Over 80% of businesses fail due to problematic cash flow management.

Quickbooks, a leading account management software, has found that over 50% of UK small businesses have cash flow problems.

Although you are paying yourself from your business, financial concerns stemming from poor cash flow can lead to sleepless nights for any freelancers out there.

One of the best ways to manage your cash flow is to have a sound projection of how much money you will be getting and spending over the next week, month or year.

Here comes cash flow forecasting.

This term might sound dull and intimidating for many beginners, but it is potentially one of the right things to determine what your cash position looks like in the future.

Cash flow forecasting allows you to plan and manage your income, expenses, and payments in advance, so you know exactly what’s coming in and going out as the month passes.

It helps you see if your cash flow is on track, and if not, it gives you time to make changes before your business falls into trouble.

In this blog, we will walk through the benefits of cash flow forecasting as well as how to do it.

What is Cash Flow Forecasting?

Cash flow forecasting enables you to predict future cash balances over a certain period. It helps make informed financial decisions.

In cash flow forecasting, you predict the money coming in and out of a business on your current cash flow and other potential factors.

Basic cash flow forecasting might look like the example given below for your freelance business.

Cash Flow

April

May

June

Cash Inflow

£8.00

£7.00

£10.00

Cash Outflow

£16.00

£14.00

£7.00

Net Cash Flow

(£8.00)

(£7.00)

£3.00

Opening Balance

£10.00

£2.00

(£5.00)

Closing Balance

£2.00

(£5.00)

(£2.00)

(Figure: 1)

In this example, the net cash flow section projects your cash position for certain months, and in both April and May this is not satisfactory, so you need to deal with that.  This is just a basic example to understand the advantages of a cash flow forecast that is an important part of your cash flow management.

What are the Benefits of Cash Flow Forecasting for Freelancers and Solopreneurs?

Plan for Cash Shortages

Through forecasting, you can accurately spot any upcoming cash shortages. This gives you time to prepare and strategise on ways to counteract the dip in your finances.

If you look at the above cash flow forecasting table (figure 1), you will find that the business is “in the red” – i.e. with a negative cash balance – in April and May. Having this knowledge allows you to take action to mitigate it.

One option may be cutting operating costs and delaying indulging in company equipment purchases, or you can tighten credit agreements with your clients to speed up the incoming cash.  You may have an overdraft that covers the shortfall or even opt for a short-term loan.

With accurate forecasting methods, anticipating any cash deficiencies should be easier and can prevent potentially hazardous reactions from occurring for your business.

Helps You Make Informed Decisions

With efficient cash flow forecasting in place, you can better understand your spending habits, budget, and cash reserves. You can analyse current and future finances to determine how much money is coming in, where it’s going, and when it’s due. Having an accurate assessment of their financial standing helps freelancers and business owners make more informed decisions and invest in their companies more wisely.

Keeps You Focused on Your Goals

Cash flow forecasting also helps set and track financial goals and keep them front-of-mind. By reviewing your cash flow regularly, you can identify trends and make decisions that will help you stay focused on the future.

Additionally, understanding how your cash flow works will help you be more strategic about how you spend and save your money.

Helps You Track Your Progress

Cash flow forecasting is a powerful tool for tracking your business’s progress over time. It can help you stay on top of your cash flow, identify potential problems and areas of improvement, and make adjustments accordingly.

For example, you can see in the cash flow table (figure 1) that June is the first month to have an overall positive net cash flow

By tracking progress, you’ll be able to see how your financial decisions are impacting your cash flow and how to best adjust them in the future.

Helps You Manage Expenses

The insights you get from cash flow forecasting are also useful when it comes to tracking existing and potential expenses. With this data, you’ll be able to identify areas of waste and cut costs, resulting in better overall financial health.

Helps You Save Money

By keeping an eye on your cash flow, you can plan for potential opportunities or expenses before they arise. By being aware of your finances, you can avoid unanticipated fees and stay within budget.

Helps You Plan for the Future

One of the major advantages of cash flow forecasting is that it lets you anticipate financial needs, identify opportunities, and create an action plan to achieve your long-term goals. You can use this information to budget and allocate resources efficiently, which will help you get closer to achieving your business objectives.

Helps You Avoid Debt

By tracking your expenses and income, you can make sure that you don’t spend more than you earn. This will help you keep your debts under control, as well as allow you to save for future investments and goals.

How to do Cash Flow Forecasting as a Freelancer?

By now, you must be convinced of the key benefits of cash flow forecasting for your business!

But how to do it?

Although it is not rocket science to do it on your own, it is important to plug in the right details.

Here’s how you can do cash flow forecasting for a freelancer or solopreneur.

Decide the Period You are Looking to Plan For

With cash flow forecasting, you can determine how much you will have on hand over a certain period.

However, aim to plan at least as far ahead as your cash flow cycle goes and try to be precise as possible.

Forecast Your Income or Sales

If you’re like most freelancers or entrepreneurs, chances are you have a very specific idea about how your income for the month will look like. Whether this is based on past sales history and trends or after careful calculations using factors like revenue from previous months and average client invoices, it helps to plan.

Enter the routine cash amount you have coming in for a certain period.

Create a row for each type of income and a column for each week or month.

Keep in mind that this refers to the time the money will arrive in your bank account.

Enter the numbers when you are certain that clients will pay invoices or that bank payments will be received.

Estimate Cash Inflows

When it comes to client payments, you probably know how much money you should have received by the end of every month. Similarly, if you keep track of your personal and business expenses on a daily or weekly basis, you can easily find out how much cash is going out – without any guesswork involved. However, all this information is still a little vague, and it doesn’t tell you what your cash flow for the month looks like.

Identify Your Expenses

At this point, you need to identify the expenses for each week or month, for instance:

  • Rent
  • Utility Bill
  • Internet Bill
  • Bank Loans
  • Taxes
  • Marketing and Advertising Expenses
  • Other Expenses.

The total for each column in your list of expenses should equal your net outgoings.

Compile the Estimates

After entering your income, expense, and payment data into a forecasting system, the next step is to compile all of them together. If you have multiple sources of income or expenses that overlap with each other – for example, if you’re splitting one bill between two different clients – it’s important to estimate as accurately as possible.

Review Your Estimated Cash Flow

After you’ve entered all your data and compiled it into a cash flow forecast, the next step is to review them. Are your income numbers on track with your actual sales for the month? What about your expenses – do they seem reasonable? Do you need to make any changes or re-calculate some of the figures to get your cash flow on track?

The Key Takeaway

Calculating cash flow is simple. Just subtract the amount of cash you are looking to spend in a month from the amount of cash you expect. This way, you will get your net cash flow. If the number is positive, you are likely to get more cash than you spend. But you will be spending more cash than you get if the results are negative.

This will be your net cash flow. If you end up with a positive number, you get more cash than you spend. A negative result means that you will be spending more cash than you earn.

Excel Spreadsheets or Dedicated Software—Which is Better for Cash Flow Forecasting?

MS Excel or any other spreadsheet tool can be ideal to do cash flow forecasting for your small venture. It is an easy way to estimate the flow of cash in and out over a specific period. Or you can opt for a dedicated cash flow forecasting software that is either free or paid.

How About Downloading our Cash Flow Forecasting Template?

We have a straight-forward, easy to use Excel template to get your cash flow forecast started. We’ve built in a “minimum acceptable” cash level, so it will alert you if things take a turn for the worse. You will easily be able to see your cash situation and whether you can afford upcoming spending.

Grab It Now

The Virtual COO was founded to help small businesses access expertise to deal with operational problems and more, without having to hire or pay for a full-time Chief Operations Officer.

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