A quick guide to cash flow forecasting

In a glance:

Cash flow management doesn’t have to be difficult however it’s more than a quick glance at your bank account for business.

Getting a handle on the flow of cash allows you to take advantage of valuable opportunities, such as purchasing a new asset, employing extra staff, utilising discount.

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

Beware: checking your bank account every week doesn’t mean you’re forecasting cash flow.

Small-scale business owners who are overwhelmed by the thought of creating an annual cash flow forecast often convince themselves that just a glance at the bank account will do the trick.

It’s essential for small business owners to know that cash flow forecasting is easy to understand and, rather than complicating things, can help make running your business easier and your chances of success higher.

Here are our top tips for forecasting cash flow as a professional.

1. Understand what cash flow is

Put simply it’s a calculation of cash flow based on your payments into and out that you owe and have on hand less what you have to pay.

A cash flow forecast can provide you with the exact amount you have in terms of liquid funds available.

Your payments in will be mostly comprised of sales. However, your payment out will cover expenses like wages, rent and taxes, as well as supplier payments.

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

If you are in control of your cash flow, you can manage your business more effectively and efficiently.

Many small businesses carry stock and need to know how much they should have on hand and whether they should buy in bulk, for example.

If you’re not planning your cash flow properly, you won’t be able to effectively manage your stocks in the bank or get the most out of opportunities when it arrives – such as the possibility of a sale on an order, for instance or the ability to purchase a new asset.

The cash flow outlook could assist you in understanding the possibility of capital expenditure and warranted at any time, and help use your funds to their greatest potential.

3. Be prepared for growth

When you first start your business, the changes that come with growth might sneak in on you. This includes the transition away from keeping the business running without much effort and not needing to keep a close eye on fluctuating cash flow.

It’s crucial to think ahead. In the event that you haven’t managed your cash flow, you could be out of stock and not being able to buy. I’ve also witnessed corporate owners finance stock purchases on personal credit cards, which could be a costly cycle that’s hard to escape from.

Pre-planning is also important in order to ensure the accuracy of budgeting for the flow of cash.

Consider things like the potential need for staffing, or the seasonal need for stock. Be sure to take note of your tax obligations , including GST and PAYE – that’s one expense area that small companies get caught by time and time again.

4. Chase your payments

It is recommended that small-scale entrepreneurs collect their payments for invoices as fast as they can.

It is often difficult to recover a debt. Chase instalments that have not been paid promptly rather than taking them off.

Invoices that are not paid can affect your business, affecting anything from replenishing stocks, or reduce your branding or advertising budget.

Find out what you’re owed by checking the cash flow projection regularly every week, once a month at the very least. If you’re not certain of where you stand, you can’t properly prepare for the future.

5. Are you feeling stuck? Do not be on your own.

Most accounting software like Xero and MYOB has the capability of forecasting cash flow that business owners can benefit from. And while it is recommended for business owners to stay aware of their cash flow themselves it’s not a bad idea to consider doing a monthly update with your accountant part of the process.

Small business owners are too busy – often their time is better focused on other aspects of their businesses. Accounting experts can assist them in planning their forecasts. Talk to your bank accounting professional or small-business lender for help with small business growing pains before they become a problem. It’s better to seek assistance whenever you feel you’ll need it, rather instead of burying your head in the sand, hoping the issues will go away.

There is no need to be an accountant in order to make or oversee the cash flow forecast. But , you should make it a frequent and constant part of your business plan. In uncertain times such as an epidemic that is spreading across the globe is more crucial than ever for small-scale business owners to build resilience into their business and one of the most effective ways to do this is through cash flow forecasting.