When fuel prices increase, everything increases. Nearly everything must be moved to be bought and sold.

And (as of writing), fuel prices are up because of the war in Iran. Even if by the time you read this, that war is over, we’ll be feeling the effects of those price increases for some time.

Enterprise Nation put together a good list of things to do now to help your business survive this crunch, including getting an energy quote, tightening cash flow, and modelling a 20% cost increase. That article is worth a quick read, and then dwell on those 5 action points at the bottom to make sure you’re prepared.

Today I want to walk you through how to model a cost increase, in case you’re not sure.

First, let’s thumb through the latest management accounts you’ve received from your accountant. You should hopefully find, among other things:

Profit & Loss (P&L)

Cash Flow Forecast

Step One: CHOOSE YOUR MODEL

They look so similar across the top (months) and the left side (income/expense categories). What’s the difference, and which should you use for your model?

Your P&L is almost certainly based on invoice date (very small businesses and sole traders can use the date the money enters/leaves their bank account, but most businesses need to use invoice date, called accruals accounting). If you invoice a client for £80k in January, but they don’t pay til March, you’ll see the income on your P&L in January.

The accruals P&L serves your compliance needs – calculating taxes owed, etc – but is not usually the best tool for forecasting in SMEs.

Turnover is vanity. Profit is sanity. Cash is king.

Most business failures are due to cash flow problems. So, model your cash flow, not your P&L.

Step Two: CREATE YOUR MODEL

Part A: Start from scratch

If you don’t have a cash flow forecast to work from, then let’s create one. Start with your P&L. Run the report from your accounting software on a cash basis, with monthly columns for April 2025 to March 2026 (the past 12 months). Export it to a spreadsheet, so you can play with the numbers.

(Accounting software is there to serve your compliance needs – reporting what’s actually happened. It doesn’t generally do forecasting well, if at all. Some of the accounting software packages have partnered with or bought forecasting software (for example, Xero and Syft), but they can have a steep learning curve, and today I want to walk you through a simpler version of the process.)

Make a copy

Of the 2025-2026 sheet, and change the dates to April 2026 – March 2027.

Adjust for expected increased expenses:

Consider which of your expenses you expect to rise (have you had notices of increases from your software providers or other suppliers?), and add those in.

Adjust for capital expenditure and loans:

This is a key difference between your P&L and your cash flow forecast. You’ll need to add the rows for these.

Consider any capital expenditure plans, and add those in.

Consider any loan repayments already planned, and add those in.

Adjust for growth/contraction:

Are you on a growth trajectory already? If so, how much? If you look like you’ll increase revenue by 20% by the end of the year, then increase it each month as appropriate, remembering any seasonal variation. Crucially, increase your costs appropriately – will you need to buy more stock? Hire more people? Pay other expenses?

Do the opposite if you’re currently contracting.

Get your cash balance at the end of each month:

At the top of April 2026, put your cash balance that you had in your accounts at the end of 31 March 2026. Then add April’s expected income, and subtract April’s expected expenses. At the bottom of that column, you get your expected cash balance at the end of April.

To that, add May’s expected income, and subtract May’s expected expenses. Do this for each month.

Then you’ll be able to see, by looking along the bottom line, where you might need to arrange an overdraft or other loan, and where you expect to be able to repay those loans.

Part B: Model increased costs

Now, we’ll use Enterprise Nation’s suggestion of a 20% increase on costs. They’ve told you to focus on your major costs, but I’m not convinced it’s only major costs that will be affected. You might want to make a couple of scenarios.

There is a scenario planning tool in Excel, but to keep it simple, make a copy of your 2026-2027 worksheet and call it 2026-2027 High. Make another copy and call it 2026-2027 Low.

In the Low sheet, increase all your major costs by 20%

In the High sheet, increase ALL your costs by 20%

What happens to your bottom line, your cash balance?

If it is no longer healthy, try increasing your revenue. Try doing so as

A sales increase (which means also increasing your costs appropriately) and

A price increase (which should incur minimal costs, but could produce less volume of sales)

Try one, the other, and a combination of the two. You’re looking to answer:

How much do you need to increase sales or prices in order to keep a healthy cash flow?

When do you need to start the increase?

Once you have these numbers and dates to focus on, you can dive into the management question: How will you accomplish the increase? Will you restructure your sales programme? Hire more sales people? Change your marketing strategy?

My clients generally experience great relief in working towards specific numbers instead of vague goals like “sell more!” The cash flow forecast and modelling are key tools in how to get those specific numbers.

There can be a lot of fine detail in forecasting that I’ve left out of this version. Today, I want to help you have something reasonable to work towards, if you lack a forecaster on your team already doing this, rather than to overwhelm you with tonnes of fine detail.

Run into any snags? Feel free to drop me a line and ask me about it. Or you might want to come to a Roundtable Business Discussion Group to talk it through.

From spreadsheets and hope to clarity and growth

You're reading my newsletter archive. To be sure you never miss an issue, sign up here: