Cash flow forecast expenses

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Entering your expenses on your cash flow forecasts can be more complicated than you might think.

Let me explain.

The first complication is where your business is registered for VAT (this includes sales tax for non EU and UK countries).

The reason this is important is that the amount which is included on the profit and loss forecast will be different to what is included on the cash flow forecast.

Amounts included on the profit and loss forecast will be net of VAT or sales tax, whereas the amounts on the cash flow forecast will included VAT or sales tax.

The second complication of overheads or expenses is payment timings.

Most businesses don’t pay all of their expenses at the same time as they are invoiced. This means that the amounts included on the profit and loss forecast fall into different months than on the cash flow forecast.

On the profit and loss forecast the amount of the expense or overhead included will be when it’s incurred or billed to you. Whereas on the cash flow forecast it will be when it is paid.
The added complication that the both of these two differences cause is how they are reflected on the balance sheet projections.

As the amounts included on the profit and loss is different to what’s included on the cash flow report, the difference relates to amounts not yet paid at the end of a month of 12 month cash flow forecast period.

The total of the amount not paid must be included on the projected balance sheet under creditors due within one year. This relates to trade creditors or supplier creditors.

One further complication that relates to expense or overheads is in respect of payroll expenses.

Payroll expenses or wages are normally split between what is paid to the employee, i.e. net pay, and what is paid in tax and National Insurance, i.e. Pay As You Earn (PAYE) in the UK or payroll taxes.
This split is important, as the timings of when each element is paid is different.

On the profit and loss account the total wages cost in included in the month it’s incurred. However, what is included on the cash flow forecast is different.

The net pay is included on the cash flow forecast in the same month as it is on the profit and loss forecast. Whereas the payroll tax element or PAYE is usually including in the following month, assuming your PAYE is paid within 30 days. However, this isn’t always the case, as some companies pay their PAYE late due to cash flow difficulties. Where this is the case, the payment timings need to be correctly reflected.

The amount outstanding at the end of each month relating to PAYE or payroll taxes needs to be included on the projected balance sheet under amounts falling due within one year.