Forecast Christmas cash flow for festive good fortune

Christmas. It’s the most wonderful time of the year. For retailers, it’s also the most important time of the year. Over one fifth of UK retail sales occur during the Christmas period (according to the Office of National Statistics).

But, seasonal spikes can be difficult to manage. You often need cash to invest in preparations before you enjoy the bonanza of Christmas cash. No wonder successful retailers of all sizes plan carefully. Let's look at the benefits of preparing a cash flow forecast for your business.

Why you should create a cash flow forecast

Every business should have an ongoing cash flow forecast which they update regularly. A profit and loss budget is important, too, but cash flow is different. You may make sales in September but, if you offer credit, you may not receive the cash until October, or even November. In the same way, you may pay for some stock in advance, but pay for other supplies a month after you use them.

Cash can get tight ahead of peak times. Here are three reasons you need funds before the Christmas rush.

1. Stock – You need things to sell. If you import goods, you may need to order and pay for these well before December. Other suppliers might require deposits to secure advance orders.

2. Staff – Businesses often need extra staff for the busy period. Incoming stock will need to be stored, staff will need training and, of course, regular staff will want time off over Christmas.

3. Marketing – Christmas campaigns need to be planned well in advance. Designers and agencies may need to be paid upfront and, obviously, you want your ads to run before people do their shopping.

Jane Gokgoz, the owner of Personalised Gifts Shop, explains how planning ahead worked for her: “For Christmas, in the gifts industry you need to have as much stock on hand as you possibly can. PayPal Working Capital means we can offer to ‘pay now’ when we order from suppliers and guarantee that the stock will be available for us. We’re not stifled in any way; it makes life a lot easier and a lot smoother. PayPal has helped me grow my business.”

How to forecast your cash flow

There are plenty of free spreadsheet templates online, so have a look around and find one that best matches your business. Most templates will open in your favourite spreadsheet package, whether you prefer Microsoft Excel, Google Sheets or Apple Numbers.

Using a spreadsheet is far better than trying to create a forecast with paper and pencil. It’s easier to update and you can save different versions to create “what if” scenarios. Spreadsheet files are also easier to share with your team or your accountant.

Here are a couple worth checking out:

Cash receipts

For many retail businesses, everything is a “cash sale”, meaning you receive the cash in your bank within a few days, whether that’s by cash, cheque, card or PayPal. But, if you give customers credit, don’t forget to reflect that in your forecast. For example, if you expect sales of £10,000 in September, but 20% will be on credit, that means that £2,000 will only turn to cash when the invoices are paid. That could be October or even November. Make sure you include any cash from other sources such as: cash injections from owners, business loans and advances like PayPal Working Capital, or money from the sale of any business assets or equipment.

Cash payments

Break your payments down into categories. That will make it easier to reflect different payment patterns. For example, you may pay your business insurances annually, your mobile phone bill monthly and your rent quarterly. It’s a good idea to use separate rows for each supplier of your stock for resale. That way, you can reflect the different payment patterns for each supplier. Don’t forget to include non-trading outflows such as: owners’ drawings or dividends paid, loan repayments or payments of tax.

Net monthly cash position

With all of the above recorded, you will begin to get an idea of your cash position at the end of each month. You may have plenty of cash in the bank today, but will you have enough to see you to December? After you’ve paid for stock, staff and marketing? Once you have an accurate forecast, you can anticipate when cash may get a bit tight and look for areas to improve. For example, are there projects you could push out to a period when you have more cash? Can you negotiate different terms with suppliers? Do you need to encourage slow-paying customers to keep to their credit terms?

A word about tax

If you are VAT-registered and pay your VAT quarterly, don’t forget to reflect this in your cash flow. On purchases, you will pay the VAT-inclusive amount to your supplier, but only reclaim the tax with each quarter’s return. In the same way, customers will pay you the VAT-inclusive price, but that includes the 20% you will pay to HMRC at the quarter-end.

If you are a UK sole trader, don’t forget that your first on-account payment of income tax will be due on 31st January. It might be helpful to extend your forecast into February to ensure everything is covered.

Plan ahead for a successful Christmas

Forecasting cash flow is essential for a successful Christmas. If you know in advance when cash will be tight, there are no surprises. You have time to plan ahead, maybe deferring some projects or looking at ways to supplement any cash flow shortages.

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