A step by step guide to cash-flow forecasting

A quick glance:

Controlling cash flow need not be difficult but it’s more than an occasional glance at your business bank account.

Getting a handle on cash flow enables you to profit from opportunities, such as purchasing an asset that is new, hiring extra staff, utilising the discount.

Getting paid on time is essential to maintain cash flow so don’t let your debtors get in the way.

Beware: checking your bank account once a week isn’t a way to forecast your cash flow.

Small business owners overwhelmed with the idea of creating an annual cash flow forecast frequently believe that only a glance over the bank account will suffice.

It’s crucial for small business owners to realize that cash flow forecasting is easy to understand and, rather than complicating things, can help to make managing your business simpler and the chances of success greater.

Below are some of our best tips for cash flow forecasting as a professional.

1. Be aware of the cash flow

Simply put the cash flow calculation is based on your payments out and in - what you are owed and what you have in the bank in cash, less the amount you have to pay.

The cash flow projection can give you an exact estimate of how much you have in the way of liquid funds.

Your cash inflows will be mostly comprised of sales. Your payments out will include expenses such as rent, wage, utilities, tax, and supplier payments.

2. Find out why it is important

If you can keep a grip of your cash flow, you can run your business more efficiently and profitably.

Many small-scale businesses have stock and need to know how much they should have on hand and if they should purchase in bulk, as an example.

If you’re not forecasting your cash flow in a timely manner, you won’t be able to control your inventory in the bank or profit from an opportunity that occurs – like the possibility of a sale on an order, for instance or the possibility to buy a new item.

Forecasting cash flows may aid you in determining whether capital expenditures are feasible and warranted at any moment, and help use your funds to the maximum potential.

3. Be prepared for the future

When you start out in business and grow, the changes that come as growth are often able to creep into your life – for example, the transition away from keeping the firm running at a steady pace and then needing to keep a close eye on fluctuating cash flow.

It’s crucial to think ahead. For instance, if you’ve not managed your cash flow, you may run running out of stocks and be being able to buy. I’ve also witnessed people who finance their purchase of stock using personal credit cards, which can be an expensive cycle that’s difficult to break out of.

It is important to plan ahead in order to ensure the accuracy of budgeting for the flow of cash.

Consider things like the potential need for extra staff, or the seasonal need for stock. And don’t forget your tax obligations including VAT and PAYE. This is an area where small companies get caught repeatedly.

4. Make sure you are able to track your payments

It’s advised that small business owners pay their invoices as quickly as they can.

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

Invoices that are not paid can cause serious problems for your business, impacting everything from replenishing stocks to having to reduce the advertising budget or branding.

Find out what you’re owed by checking your cash flow forecast on a regular basis Each week is the ideal every month, at a minimum. If you’re not aware of where you stand and how they’ll change, it’s impossible to make a proper prepare for the future.

5. Feeling stuck? Don’t try to solve it on your own.

Most accounting software like Xero and MYOB offers cash flow forecasting capabilities that business owners can use. It’s a good idea for business owners to be aware in their financial situation themselves, there’s nothing wrong with creating a monthly update along with your accountant part of the process.

Small business owners are already busy enough. Sometimes their time is better focused on other aspects of their businesses. Accounting experts can help organise their forecasting. Talk to your bank accounting professional or small-business loan provider for help with small business growth issues before they become an issue. It’s better to seek assistance whenever you feel you may need it rather instead of burying your heads in the sand hoping the issues will go away.

It doesn’t require an accountant to create or manage the budget for your cash flow. However, it is important to make it a frequent and consistent part of your business’s planning. When you’re in a time of uncertainty such as the global pandemic that is now more critical than ever for small-scale business owners to build resilience into their companies and one of the more effective ways to do this is to forecast cash flow.