It’s a cliche for a good reason – cash is king in any business. There can’t be many agency founders that haven’t experienced anxiety about cashflow, often for extended periods. It leads to a lack of confidence in making decisions and an inability to take the calculated risks required to grow an agency.

This is why cashflow forecasting is such a critical part of taking control of your agency’s finances. Knowing what your bank balance will look like over the coming months will provide the confidence you need and, most importantly, will help you avoid cashflow issues.

Here’s how to build your cashflow forecast:

1) Understand the basics

Your forecast will show you your predicted cash balance at regular intervals into the future. Generally, a monthly view will be sufficient – i.e. forecasting the cash balance on the last day of each month. But you may want a weekly or even daily view, if you’re facing a cashflow crisis. Your forecast should extend at least three months into the future, and ideally six.

2) Choose your method

Possibly the most efficient way to forecast your cashflow is to use a plugin to your finance software (eg the Float plugin for Xero), as some elements of the forecast will be included and updated automatically. But there’s still plenty of manual work required with this method, and taking account of the automatic updates can be fiddly at times. You can also use a spreadsheet for fully manual cashflow forecasting, which can involve a bit more work but gives you greater control.

I’ll focus on using a simple spreadsheet here, but the general principles apply to any approach. Start by creating your spreadsheet structure, with headers for date, transaction, cash in, cash out, and balance. In row 2, enter today’s date and today’s opening cash balance.

3) Include all incoming payments

Now start adding all expected incoming payments, one per row. Be systematic and comprehensive with this – you need to go through every invoice you’ve already sent and include them in your sheet, with the date you expect the payment to land in your bank account. Then add all invoices you expect to send over the coming weeks and months, and when they’re likely to be paid. At this stage, only include invoices for confirmed work. Remember to include the full amount of each invoice, including VAT.

3) Include all outgoings

Next, add all the outgoings you’ll be incurring, again including the date you’ll be paying each one. Be sure to include everything here – payments for salaries, freelancers, regular software subscriptions, etc. Don’t forget tax payments – PAYE, VAT and corporation tax. And be sure to include any additional costs you’re expecting to incur – eg any new hires, etc.

4) Format your forecast

Now that you have a list of all of your incoming and outgoing payments, you want to arrange them all in date order. In Google Sheets, click on the “date” header cell, go to the Data menu and choose Sort sheet – Sort sheet by column A (A-Z). In Excel, go to the Data menu and click on the icon that shows an A and a Z with a down arrow. Once the data is sorted, enter the following formula into cell E3, which should be the cell directly below today’s opening balance: =E2+C3-D3. This takes the previous balance, adds any incoming payments and deducts any outgoing payments, to create the updated balance. Copy cell E3 right down the column, so that each row has a new updated balance.

5) Review your forecast

Your forecast is now ready to review. You can go down your list, finding the final entry for each month (which is your forecast closing balance) and highlighting it in some way for ease of reading. What is your forecast showing you? Does it reveal any potential difficult moments coming up, with a balance getting close to (or even below) zero? Do check you’ve captured all of your incoming payments as a first step, and be aware that it’s common for largely project-based agencies with little future visibility to have cashflow forecasts that fall significantly in month three onwards (which is why aiming to have a cash buffer available is so important).

You’ll notice that I’ve deliberately left out any pipeline-related income at this stage. It adds a layer of complexity that’s beyond this article, and it’s always important to have a view of cashflow that specifically excludes pipeline. However, it can also be helpful to create a separate forecast that includes it.

Regularly updating and reviewing your cashflow forecast – and taking action to avoid any difficulties – should go a long way in helping you feel in control of your agency’s finances.

Paul Muggeridge-Breene is an exited agency founder, qualified accountant, former international journalist and a member of the British Psychological Society. Please get in touch if you’d like to discuss how Thrive can help you.