A step by step guide to cash flow forecasting
In a glance:
Controlling cash flow need not be complicated but it’s more than an occasional glance at your business’s bank account.
A good understanding of cash flow enables you to make the most of opportunities. Think about buying new equipment, hiring extra staff, utilising a discount.
Getting paid on time is vital to keep cash flow , so don’t let your creditors drag.
A heads up: checking your bank account once a week isn’t forecasting your cash flow.
Small business owners overwhelmed with the idea of making the cash flow forecast typically believe that just a glance at the bank account will do the trick.
It’s important for small business owners to know the importance of cash flow forecasting. It’s very simple and, instead of complimenting things, can simplify running your business and your chances of success higher.
These are the top suggestions for cash flow forecasting as a professional.
1. Know what cash flow is.
Simply put, cash flow is calculated by calculating your cash flow based on the amount you pay out and in and what you are owed and what you have in the bank less what you have to pay.
The cash flow projection will provide you with the exact amount you have in terms of available liquid funds.
Your cash inflows will be mostly comprised of sales, whereas your cash outs will also include costs such as rent, wages, taxes, as well as supplier payments.
2. Know why it matters
If you can keep a grip on your cash flow , you can manage your business more efficiently and profitably.
Many small-scale businesses have stocks and must know how much they should have in their inventory and if they should purchase in bulk, for example.
If you’re not planning your cash flow in a timely manner, you won’t be able to control your inventory available or make the most of an opportunity that is available - discounts on orders, for instance, or being able to buy a new asset.
A cash flow forecast may provide you with an understanding of whether capital expenditure is possible and warranted at any time and assist in utilizing your funds to their fullest potential.
3. Be prepared to expand
As you begin your journey in business it is possible that the changes that come with growth might sneak over you, including the change of being capable of keeping the company running smoothly and then needing to keep a close eye on fluctuating cash flow.
It’s crucial to think ahead. In the event that you’ve not managed your cash flow you can be out of stock and able to purchase. I’ve also witnessed corporate owners finance purchase of stock using personal credit cards. This can be a costly cycle that’s very difficult to get out of.
Pre-planning is also important when it comes to accurate planning for cash flows.
Be aware of things like the need for extra staff, or the seasonal need for stock. Be sure to take note of your taxes, which include VAT and PAYE. This is one expense area that small companies get caught every now and again.
4. Make sure you are able to track your payments
It is recommended that small-scale businesses collect the payment for invoices as quickly as they can.
It can be very difficult to get back a late payment. Chase the invoices that are not paid immediately rather than let them linger.
Invoices not paid may be a major problem for your business, and can affect everything from your ability to replenish stocks to having to cut back on your branding or advertising budget.
Find out what you’re owed by checking in with an annual cash flow plan regularly Each week is the ideal, once a month at minimum. If you’re not certain of where things stand and how they’ll change, it’s impossible to make a proper think about what’s to come.
5. Do you feel stuck? Don’t go it alone.
A majority of accounting software, such as Xero and MYOB offers cash flow forecasting capabilities that business owners can use. While it’s an excellent idea for business owners to stay at the top of their cash flow, there’s nothing wrong with creating a monthly update along with your accountant part of the process.
Small business owners are busy enough – sometimes their time is better used on other areas of the business and accountants can assist in organising their forecasts. Talk to your bank accountant or business lender for help with the growing issues of small businesses before they become a problem. It is better to seek help whenever you feel you might need it than to bury your head in the sand, hoping the issues will go away.
It doesn’t require an accountant to develop or manage an accurate financial forecast for cash flows. But you do need to make it a frequent and consistent part of your business’s planning. In times of uncertainty, such as an epidemic that is spreading across the globe, it’s more important than ever before for small entrepreneurs to instill resilience into their businesses and among the most powerful ways to do that is through cash flow forecasting.
