A step by step guide to cash flow forecasting
In a glance:
Controlling cash flow doesn’t have to be difficult, but it requires more than just a few glances at your business’s bank account.
Getting a handle on the flow of cash lets you take advantage of valuable opportunities such as buying new equipment, hiring more staff, or utilizing the discount.
Getting paid on time is crucial to ensure cash flow . Don’t let your debtors slow you down.
Attention: looking at your bank account at least once a week isn’t a way to forecast your cash flow.
Small-scale 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 accomplish the task.
It’s crucial for small business owners to know that forecasting cash flow is easy to understand and, rather than complicating things, can help make running your business easier and your chance at success greater.
Below are some of our best tips to forecast cash flow as a professional.
1. Know what cash flow is.
Put simply it’s a calculation of cash flow according to your payment out and in that you owe and what you have in the bank less what you are owed.
The cash flow projection can give you an exact estimate of how much you’ve got in terms of available liquid funds.
The money you pay in will mostly made up of sales. Your cash outs will also include costs like wages, rent and taxes, utilities and supplier payments.
2. Know why it matters
If you can keep a grip on your cash flow you can manage your business more efficient and effectively.
Small businesses often have inventory and require how much stock they should keep in their inventory and whether they should buy in bulk, like.
If you’re not planning your cash flow properly, you won’t be able to manage your stock on hand or make the most of an opportunity that comes your way - the possibility of a sale on an order like that or the ability to purchase a brand new asset.
A cash flow forecast will aid you in determining whether capital expenditure is feasible and is warranted at any point, and help use your funds to their greatest potential.
3. Be ready for the future
As you begin your journey in business and grow, the changes that come from growth may sneak over you, including the change away from keeping the company running smoothly, to needing to keep watch on fluctuations in cash flow.
It’s essential to prepare ahead. For example, if you haven’t managed your cash flow, you might run running out of stocks and be being able to buy. I’ve also witnessed people who finance their stock purchases using personal credit cards, which can be an expensive cycle that’s hard to come out of.
Planning ahead is essential in order to ensure accurate budgeting for the flow of cash.
Consider things like the potential need for extra staff, or the seasonal demand for stocks. Be sure to take note of your tax obligations including GST and PAYE – that’s one expense area that small-sized companies are caught repeatedly.
4. You can use the Chase option to make your payments
It’s advised that small business owners collect payments for invoices as soon as possible.
It can be difficult to get a payment that is not paid. Chase accounts that are unpaid immediately instead of let them linger.
Invoices that aren’t paid can sometimes have a serious impact on your business, and can affect everything from replenishing stocks to having to cut back on the budget for advertising and branding.
Know what you’re owed by reviewing the cash flow projection regularly every week each month, or once at a minimum. If you’re not sure where you stand, you can’t properly plan for what’s ahead.
5. Feeling stuck? Don’t try to solve it on your own.
Most accounting software like Xero and MYOB includes the ability to forecast cash flow, which entrepreneurs can make use of. And while it is an excellent idea to keep business owners on top on their money flow themselves There’s nothing wrong with doing a monthly update with your accountant as part of the process.
Small business owners are busy enough – sometimes their time is better used on other areas of their business. Accounting professionals can assist in organising their forecasts. Talk to your bank accountant or small business loan provider for assistance in tackling small business growth issues before they become a problem. It’s better to seek assistance whenever you feel you may need it rather instead of burying your head in the sand and pray that your problems will disappear.
You don’t need to be an accountant to develop or oversee an accurate budget for your cash flow. But you do need to make it a frequent and consistent element of your business’s plan. In times of uncertainty, such as a global pandemic that is now more critical than ever before for small business owners to incorporate resilience into their businesses and one of the more powerful methods of doing this is cash flow forecasting.
