A step by step guide to cash flow forecasting
A quick glance:
Cash flow management should not be difficult, but it requires more than a glance at your business bank account.
Getting a handle on the flow of cash lets you profit from opportunities such as buying a new asset, employing more staff, or utilizing the discount.
Getting paid on time is crucial to ensure cash flow . Don’t let your creditors hold you back.
A heads up: checking your bank account every week isn’t forecasting your cash flow.
Small business owners who are overwhelmed by the idea of making the cash flow forecast typically believe that just a glance at the bank account will be enough to get the job done.
It is crucial for small-scale business owners to realize the importance of cash flow forecasting. It’s simple and, instead of complimenting things, can make running your business easier and the chances of succeeding higher.
These are the top tips to forecast cash flow like a pro.
1. Know what cash flow is.
Put simply the cash flow calculation is by calculating your cash flow based on the amount you pay in and your out - what you are owed and have in cash, less what you have to pay.
Cash flow estimates can provide you with the exact amount you have in terms of liquid funds.
The money you pay in will predominantly comprised of sales, whereas your payment out will cover expenses like rent, wages, taxes, as well as supplier payments.
2. Find out why it is important
When you have a handle on your cash flow you can run your business efficient and effectively.
A lot of small-scale businesses keep stocks and must know how much stock they should keep on hand and whether they can purchase in bulk, as an example.
If you’re not planning your cash flow accurately it will be difficult to effectively manage your stocks on hand or take advantage of opportunities when it comes your way - the possibility of a sale on an order for instance or the ability to purchase a brand new asset.
An accurate cash flow projection could assist you in understanding whether capital expenditure is possible and warranted at any time and also help you use your funds to their fullest potential.
3. Be prepared for the future
When you first start your business, the changes that come with growth can sometimes creep up on you – including the transition from being able to keep your business ticking over simply and not needing to keep watch on fluctuations in cash flow.
It is essential to plan ahead. For example, if you’ve not managed your cash flow you can run running out of stocks and be capable of purchasing. I’ve also witnessed people who finance their purchase of stock using personal credit cards, which can be an expensive cycle that’s very difficult to come out of.
It is important to plan ahead for effective budgeting for the flow of cash.
Be aware of things like the need for extra staff, or the seasonal demand for stocks. Also, don’t forget to think about tax obligations like the PAYE and GST. That’s one of the areas where small businesses get caught out by time and time again.
4. You can use the Chase option to make your payments
It is suggested that small-scale business owners pay their invoices as fast as they can.
It is often difficult to get a payment that is not paid. Chase unpaid invoices immediately rather than waiting for them to accumulate.
Invoices that are not paid can be a major problem for your business, affecting anything from your ability to replenish stocks to having to reduce your advertising or branding budget.
Know what you’re owed by checking in with the cash flow projection regularly every week and once per month at the very least. If you’re not sure where things stand, you can’t properly prepare for the future.
5. Feeling stuck? Don’t try to solve it on your own.
Most accounting software like Xero and MYOB has the ability to forecast cash flow, which business owners can utilize. Although it’s recommended for business owners to stay on top in their financial situation themselves, there’s nothing wrong with making a monthly update alongside your accountant part of the process.
Small business owners are too busy – often their time can be better used on other areas of their business. Accounting professionals can assist with their forecasting. Contact your bank’s accountant or small company loan provider to get help addressing small business growing pains prior to them becoming a problem. It’s better to get help immediately if you think that you’ll require it instead of burying your head in the sand and pray that things will get better.
There is no need to be an accountant to prepare or oversee an accurate budget for your cash flow. However, you must ensure it is a regular and consistent element of your business’s plan. 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 develop resilience into their businesses and one of the more powerful methods to achieve this is by calculating cash flow forecasts.
