A step by step guide to cash flow forecasting
At a glance:
Cash flow management should not be difficult however, it takes more than just a few glances at your bank account for business.
Controlling the flow of cash allows you to make the most of opportunities – think buying an asset that is new, hiring extra staff, utilising discount.
Getting paid on time is essential to maintain the flow of cash, so don’t allow your creditors hold you back.
Beware: checking your bank accounts once a week isn’t cash flow forecasting.
Small business owners who are overwhelmed by the thought of creating an annual cash flow forecast often convince themselves that a quick glance at the bank account can be enough to get the job done.
It is crucial for small-scale business owners to realize the importance of cash flow forecasting. It’s quite straightforward and, instead of complimenting things, can help make running your business easier and your chance at success greater.
Below are some of our best suggestions to forecast cash flow as a professional.
1. Be aware of the cash flow
In simple terms, cash flow is calculated using your transactions in and your payments out and what you are owed and what you have in the bank less what you are owed.
An cash flow prediction can give you an exact estimate of how much you’ve got in terms of liquid funds.
Your payments in will be predominantly comprised of sales, whereas your payments out will include expenses like wages, rent and taxes, as well as supplier payments.
2. Be aware of the reasons why it’s important
When you have a handle of your cash flow, you can manage your business more effectively and efficiently.
A lot of small-scale businesses keep inventory and require how much they should have in their inventory and if they should purchase in bulk, as an example.
If you’re not forecasting your cash flow properly it will be difficult to manage your stock in the bank or take advantage of an opportunity that arrives – such as a discount on an order for instance or the ability to purchase a brand new asset.
The cash flow outlook will aid you in determining whether capital expenditure is possible and warranted at any time and assist in utilizing your funds to their fullest potential.
3. Be ready to grow
When you start out in business and grow, the changes that come with growth can sometimes creep up on you – including the shift between being in a position to maintain the company running smoothly while keeping an eye on changing cash flow.
It’s essential to prepare ahead. For example, if you’ve not managed your cash flow you can find yourself out of stock and capable of purchasing. I’ve also witnessed business owners finance purchase of stock using personal credit cards, which can result in a high-cost cycle that is difficult to escape from.
Planning ahead is essential when it comes to successful cash flow forecasting.
Be aware of things like the demand for more staff or seasonal demand for inventory. Don’t forget about your tax obligations including PAYE and GST – that’s an area where small-sized businesses are caught every now and again.
4. You can use the Chase option to make your payments
It is recommended that small-scale business owners pay their invoices as quickly as they can.
It is often difficult to recover an outstanding payment. Chase instalments that have not been paid promptly rather than waiting for them to accumulate.
Invoices that aren’t paid can sometimes be a major problem for your business, impacting everything including the ability to replenish stocks to having to reduce your advertising or branding budget.
Make sure you know what you’re due by checking in with an annual cash flow plan frequently every week every month, at a minimum. If you’re not certain of the current situation then you’re not able to properly prepare for what’s coming up.
5. Feeling stuck? Don’t go it alone.
The majority of accounting software such as Xero and MYOB has the ability to forecast cash flow, which business owners can benefit from. While it’s beneficial for business owners to stay in control on their money flow There’s nothing wrong with doing a monthly update with your accountant as part of the process.
Small-scale business owners are often busy enough – sometimes their time could be better to be spent on other aspects of their business. Accountants can assist them in planning their forecasts. Consult with your bank’s accountant or small business loan provider to get help addressing small business growth issues prior to them becoming a problem. It is better to seek help immediately if you think you’ll need it, rather instead of sticking your head in the sand hoping the problems will go away.
You don’t need to be an accountant to prepare or oversee an accurate Cash flow projection. But you do need to create it as a regular and consistent part of your business planning. When you’re in a time of uncertainty such as the global pandemic, it’s more important than ever for small business owners to develop resilience into their businesses and among the most effective ways to do this is through cash flow forecasting.
