A step by step guide to cash-flow forecasting

At a glance:

Managing cash flow doesn’t have to be difficult, but it requires more than an occasional glance at your bank account for business.

Being aware of the flow of cash lets you benefit from lucrative opportunities – think buying an asset that is new, hiring additional employees, or making use of a discount.

Paying on time is vital to keep cash flow , so don’t let your creditors drag.

Heads up: looking at your bank accounts once a week isn’t a way to forecast your cash flow.

Small business owners who are overwhelmed by the idea of creating a cash flow forecast will often think that a quick glance at the bank account can suffice.

It’s crucial for small business owners to realize that forecasting cash flow is quite straightforward and, instead of complimenting things, it can in making running your business more efficient and your odds of success greater.

We’ve got the best advice to forecast cash flow like a pro.

1. Know what cash flow is.

Simply put the cash flow calculation is based on your payments out and in and what you are owed and have in cash less what you owe.

An cash flow prediction can show you exactly how much you have in the way of available liquid funds.

Your cash inflows will be predominantly comprised of sales, while your payments out will include expenses such as rent, wages, taxes, utilities and supplier payments.

2. Be aware of the reasons why it’s important

If you have a grasp on your cash flow you can run your business effectively and efficiently.

Many small-scale businesses have inventory and require what they need on hand and whether they need to purchase in bulk, for example.

If you’re not forecasting your cash flow in a timely manner, you won’t be able to effectively manage your stocks available or profit from a good opportunity when it occurs – like a discount on an order for instance or the ability to purchase a new asset.

A cash flow forecast can assist you in understanding whether capital expenditure is feasible and is warranted at any time and also help you use your funds to their fullest potential.

3. Be prepared for growth

When you start out in business you will notice that the changes with growth might sneak into your life – for example, the shift from being able to keep your business ticking over simply while keeping watch on fluctuations in cash flow.

It is essential to plan ahead. For instance, if you haven’t managed your cash flow, you may run in a stock shortage and not be able to purchase. I’ve also seen business owners finance stock purchases on personal credit cards. This could be a costly cycle that’s hard to escape from.

It is important to plan ahead for the accuracy of budgeting for the flow of cash.

Be aware of things like the need for extra staff, or the seasonal need for stock. Be sure to take note of your tax obligations including PAYE and GST – that’s an area where small-sized companies are caught every now and again.

4. Chase your payments

It is suggested that small-scale business owners pay their invoices as quickly as they can.

It can be difficult to get a payment that is not paid. Chase instalments that have not been paid promptly rather than letting them drag out.

Unpaid invoices can sometimes cause serious problems for your business, and can affect everything from replenishing stock, to having to reduce the budget for advertising and branding.

Know what you’re owed by reviewing an annual cash flow plan regularly every week every month, at minimum. If you’re not aware of what’s happening and how they’ll change, it’s impossible to make a proper plan for what’s ahead.

5. Are you stuck? Don’t be alone.

The majority of accounting software such as Xero and MYOB has the capability of forecasting cash flow that business owners can benefit from. Although it’s beneficial to keep business owners aware the flow of cash but there’s nothing wrong with having a monthly report with your accountant as part of the process.

Small business owners are too busy – often their time could be better to be spent on other aspects of their business. Accountants can assist them in planning their forecasts. Speak to your bank’s accountant or small company loan provider for help with small business growing pains before they become an issue. It’s better to seek assistance as soon as you think that you’ll require it instead of burying your head in the sand and hope your problems will disappear.

It doesn’t require an accountant in order to make or manage the financial forecast for cash flows. However, you must create it as a regular and regular part of your business’s planning. When you’re in a time of uncertainty such as a global pandemic that is now more critical than ever before for small business owners to incorporate resilience into their business and one of the more effective methods to achieve this is to forecast cash flow.