A step by step guide to cash flow forecasting

At a glance:

Controlling cash flow should not be difficult however, it takes more than a quick glance at your business’s bank account.

A good understanding of your cash flow allows you to benefit from lucrative opportunities such as buying an asset that is new, hiring additional employees, or making use of a discount.

Getting paid on time is vital to keep the flow of cash, so don’t allow your creditors slow you down.

Heads up: looking at your bank account once a week doesn’t mean you’re forecasting cash flow.

Small business owners overwhelmed with the idea of making a cash flow forecast will often think that a quick glance at the bank account will be enough to get the job done.

It’s essential for small business owners to know that cash flow forecasting is simple and, rather than complicating things, can to make managing your business simpler and your chance at being successful is higher.

These are the top advice to forecast cash flow like a pro.

1. Be aware of the cash flow

Put simply it’s a calculation of cash flow according to your payment into and out - what you are owed and have in cash in cash, less the amount you are owed.

The cash flow projection will show you exactly how much you have in the way of available liquid funds.

The money you pay in will mostly comprised of sales, while your payment out will cover expenses like wages, rent and taxes, utilities and supplier payments.

2. Know why it matters

When you have a handle on your cash flow , you can run your business more efficient and effectively.

Small businesses often have stocks and must know how much stock they should keep available and whether they can purchase in bulk, for instance.

If you’re not forecasting your cash flow properly then you’ll be unable to manage your stock available or take advantage of the opportunity that comes your way - for instance, a price reduction on an order like that or being able to buy a new item.

The cash flow outlook may help you understand whether capital expenditures are feasible and warranted at any time and will help you utilize your funds to their greatest potential.

3. Be prepared to expand

When you first start your business, the changes that come as growth are often able to creep into your life – for example, the transition between being in a position to maintain your company running smoothly while keeping an eye on changing cash flow.

It’s critical to plan ahead. For instance, if you haven’t managed your cash flow, you might run running out of stocks and be capable of purchasing. I’ve also witnessed businesses finance stock purchases on personal credit cards. This could be a costly cycle that is difficult to come out of.

Pre-planning is also important when it comes to successful cash flow forecasting.

Consider things like the potential requirement for additional staff, or the seasonal demand for stock. And don’t forget your tax obligations like VAT and PAYE. This is one expense area that small-sized companies are caught often and repeatedly.

4. Chase your payments

It is advised that small entrepreneurs collect their payments for invoices as fast as they can.

It is often difficult to recover an outstanding payment. Chase instalments that have not been paid promptly rather than let them linger.

Unpaid invoices can sometimes cause serious problems for your business, affecting anything from your ability to replenish stocks, or reduce your advertising or branding budget.

Be aware of what you owe by checking in with an annual cash flow plan frequently - each week is ideal and once per month at minimum. If you don’t know what’s happening then you’re not able to properly think about what’s to come.

5. Are you feeling stuck? Don’t go it alone.

The majority of accounting software such as Xero and MYOB offers the ability to forecast cash flow, which business owners can utilize. It’s a good idea for business owners to stay on top on their money flow themselves it’s not a bad idea to consider doing a monthly update with your accountant as part of the process.

Small-scale business owners are often too busy – often their time should be spent on other aspects of their businesses. Accounting experts can assist with their forecasting. Speak to your bank’s accountant or business lender to get help addressing the growing issues of small businesses before they become a problem. It’s better to seek assistance as soon as you think you’ll need it, rather instead of sticking your head in the sand, hoping your problems will disappear.

You don’t have to be an accountant to develop or manage a budget for your cash flow. But , you should ensure it is a regular and constant part of your business plan. When you’re in a time of uncertainty such as an outbreak in the world that is now more critical than ever for small business owners to build resilience into their companies and one of the more powerful methods of doing this is cash flow forecasting.