A step by step guide to cash-flow forecasting
A quick glance:
Cash flow management does not have to be complicated but it’s more than a glance at your bank account for business.
Being aware of the flow of cash allows you to take advantage of valuable opportunities – think buying an item that’s new, hiring extra staff, utilising discounts.
When you pay on time, it is critical to maintaining cash flow so don’t let your creditors get in the way.
Attention: looking at your bank account once a week isn’t cash flow forecasting.
Small-scale business owners overwhelmed by the thought of preparing a cash flow forecast will typically believe that just a glance at their bank account will be enough to get the job done.
It’s crucial for small entrepreneurs to be aware the importance of cash flow forecasting. It’s simple and, rather than complicating things, can help simplify running your business and the chances of success greater.
Below are some of our best advice to forecast cash flow as a professional.
1. Learn about cash flow
Simply put, cash flow is calculated using your transactions into and out which is what you owe and have on hand and what you have on hand, less what you are owed.
Cash flow estimates can provide you with the exact amount you’ve got in terms of liquid funds.
Your cash inflows will be mostly made up of sales, while your payments out will include expenses such as rent, wage, utilities, tax, and supplier payments.
2. Find out why it is important
When you have a handle of your cash flow, you are able to run your business more efficiently and successfully.
Small businesses often have stock and need to know what they need on hand and whether they should buy in bulk, as an example.
If you’re not planning your cash flow in a timely manner then you’ll be unable to manage your stock in the bank or profit from the opportunity that is available - discounts on orders, for instance, or being able to buy a new item.
An accurate cash flow projection will assist you in understanding whether capital expenditure is feasible and warranted at any moment, and help use your funds to the maximum potential.
3. Be ready for the future
If you are just beginning your career in business, the changes that come from growth may sneak in on you. This includes the transition from being able to keep your business ticking over simply, to needing to keep watch on fluctuations in cash flow.
It’s critical to plan ahead. For example, if you haven’t managed your cash flow, you may run out of stock and being able to buy. I’ve also witnessed people who finance their purchase of stock using personal credit cards, which could be a costly cycle that’s very difficult to escape from.
It is important to plan ahead in order to ensure effective financial forecasting.
Think about things like the requirement for additional staff, or the seasonal demand for stock. Don’t forget about your tax obligations like PAYE and GST – that’s one area of expense that small businesses get caught out often and repeatedly.
4. Make sure you are able to track your payments
It’s advised that small entrepreneurs collect their payments for invoices as fast as they can.
It is often difficult to recover a debt. Chase accounts that are unpaid immediately instead of let them linger.
Unpaid invoices can sometimes be a major problem for your business, and can affect everything from the ability to replenish stock, to having to cut back on your advertising or branding budget.
Know what you’re owed by reviewing your forecast for cash flows frequently Every week is ideal each month, or once at minimum. If you’re not aware of where things stand it’s difficult to plan for what’s ahead.
5. Do you feel stuck? Do not be on your own.
A majority of accounting software, such as Xero and MYOB has cash flow forecasting capabilities that business owners can utilize. It’s beneficial to keep business owners at the top in their financial situation 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 working enough and their time should be to be spent on other aspects of their business. Accountants can assist with their forecasting. Speak to your bank’s accounting professional or small-business lender for help with problems with growing a small business before they become a problem. It’s best to seek help whenever you feel you’ll need it, rather than to bury your head in the sand and pray that the problems will go away.
It doesn’t require an accountant in order to make or manage an accurate Cash flow projection. But you do need to make it a regular and consistent element of your business’s plan. In uncertain times such as the global pandemic and a global pandemic, it’s more essential than ever before for small business owners to incorporate resilience into their companies and one of the most powerful methods to achieve this is cash flow forecasting.
