A step by step guide to cash-flow forecasting

In a glance:

The management of cash flow need not be complicated, but it requires more than an occasional glance at your company’s bank account.

Getting a handle on cash flow enables you to make the most of opportunities – think buying an item that’s new, hiring extra staff, utilising the discount.

Getting paid on time is crucial to ensure cash flow so don’t let your debtors hold you back.

Beware: checking your bank accounts once a week isn’t forecasting your cash flow.

Small business owners overwhelmed with the idea of creating an annual cash flow forecast often think that just a glance at their bank account can accomplish the task.

It’s crucial for small entrepreneurs to be aware the importance of cash flow forecasting. It’s easy to understand and, instead of complimenting things, it can simplify running your business and your chance at being successful is higher.

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

1. Learn about cash flow

In simple terms it is using your transactions in and your out that you owe and have in your account, less what you have to pay.

An cash flow prediction will show you exactly how much you’ve got in terms of liquid funds.

Your cash inflows will be predominantly comprised of sales, whereas your cash outs will also include costs like wages, rent and taxes, as well as supplier payments.

2. Know why it matters

When you have a handle on your cash flow you can manage your business more effectively and efficiently.

Many small-scale businesses have stock and need to know how much they should have on hand and whether they need to purchase in bulk, for instance.

If you’re not forecasting your cash flow correctly it will be difficult to control your inventory on hand or profit from opportunities when it occurs – like for instance, a price reduction on an order such as, for example, or being able to purchase a brand new asset.

Forecasting cash flows will aid you in determining whether capital expenditure is feasible and warranted at any time and also help you use your funds to their greatest potential.

3. Be prepared for growth

When you first start your business you will notice that the changes with growth can sometimes creep into your life – for example, the transition from being able to keep the business ticking over simply and not needing to keep an eye on changing cash flow.

It’s critical to plan ahead. For example, if you’ve not managed your cash flow, you might be out of stock and being able to buy. I’ve also seen businesses finance stock purchases using personal credit cards. This can be an expensive cycle that’s very difficult to escape from.

It is important to plan ahead in order to ensure successful financial forecasting.

Think about things like the need for staffing, or the seasonal need for stock. And don’t forget your tax obligations , including VAT and PAYE. This is one of the areas where small-sized businesses are caught repeatedly.

4. You can use the Chase option to make your payments

It is advised that small business owners collect payments for invoices as soon as they are able to.

It is often difficult to get a payment that is not paid. Chase the invoices that are not paid immediately rather than taking them off.

Invoices that aren’t paid can sometimes be a major problem for your business, affecting anything from the ability to replenish stock, to having to reduce your branding or advertising budget.

Know what you’re owed by checking in with the cash flow projection regularly - each week is ideal every month, at minimum. If you’re not aware of the current situation it’s difficult to think about what’s to come.

5. Feeling stuck? Do not be on your own.

A majority of accounting software, such as Xero and MYOB offers cash flow forecasting features that business owners can benefit from. It’s recommended for business owners to be on top the flow of cash themselves There’s nothing wrong with making a monthly update alongside your accountant part of the process.

Small business owners are busy enough – sometimes their time can be better used on other areas of the business and accountants can help organise their forecasting. Speak to your bank’s accounting professional or small-business lender to find solutions to the growing issues of small businesses prior to them becoming a problem. It’s best to seek help as soon as you think that you’ll require it than to bury your head in the sand hoping your problems will disappear.

It doesn’t require an accountant to develop or manage an accurate Cash flow projection. However, you must create it as a regular and consistent element of your business’s planning. In uncertain times such as an outbreak in the world that is now more critical than ever for small business owners to develop resilience into their business and one of the more powerful ways to do that is cash flow forecasting.