A quick guide to cash flow forecasting
A quick glance:
The management of cash flow needn’t be complicated however it’s more than a glance at your business bank account.
A good understanding of the flow of cash lets you make the most of opportunities – think buying new equipment, hiring additional employees, or making use of a discount.
When you pay on time, it is crucial to ensure 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-scale business owners who are overwhelmed by the thought of preparing an annual cash flow forecast typically believe that just a glance at their bank account will suffice.
It is crucial for small-scale business owners to understand the importance of cash flow forecasting. It’s quite straightforward and, rather than complicating things, can help make running your business easier and your odds of success higher.
These are the top advice for forecasting cash flow like a pro.
1. Be aware of the cash flow
In simple terms it’s a calculation of cash flow based on your payments into and out that you owe and have on hand less what you have to pay.
Cash flow estimates will provide you with the exact amount you’ve got in terms of liquid funds available.
The money you pay in will predominantly comprised of sales. However, your payment out will cover expenses like wages, rent and taxes, utilities and supplier payments.
2. Learn why it’s important
When you have a handle on your cash flow you can run your business more effectively and efficiently.
Many small-scale businesses have stock and need to know what they need in stock 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 control your inventory in the bank or get the most out of the opportunity that is available - the possibility of a sale on an order, for instance or the possibility to buy a new item.
A cash flow forecast will aid you in determining whether capital expenditures are feasible and is warranted at any point and will help you utilize your money to its fullest potential.
3. Be ready to grow
When you start out in business it is possible that the changes that come as growth are often able to creep in on you. This includes the change away from keeping the business ticking over simply while keeping watch on fluctuations in cash flow.
It’s critical to plan ahead. If, for instance, you don’t manage your cash flow you can find yourself in a stock shortage and not be in a position to purchase. I’ve also seen people who finance their purchase of stocks using personal credit cards, which can be a costly cycle that’s difficult to break out of.
Planning ahead is essential for effective budgeting for the flow of cash.
Be aware of things like the need for extra staff, or the seasonal demand for inventory. Be sure to take note of your tax obligations like VAT and PAYE. This is one area of expense that small businesses get caught out by time and time again.
4. Pay your bills with cash
It is suggested that small-scale businesses collect the payment for invoices as fast as they can.
It isn’t easy to recover an outstanding payment. Chase instalments that have not been paid promptly instead of taking them off.
Unpaid invoices can sometimes have a serious impact on your business, affecting everything including the ability to replenish stocks to having to cut back on the advertising budget or branding.
Be aware of what you owe by checking an annual cash flow plan on a regular basis - each week is ideal each month, or once at minimum. If you’re not certain of what’s happening and how they’ll change, it’s impossible to make a proper prepare for the future.
5. Feeling stuck? Do not be on your own.
A majority of accounting software, such as Xero and MYOB has cash flow forecasting features that entrepreneurs can make use of. It’s an excellent idea for business owners to stay in control of their cash flow, there’s nothing wrong with making a monthly update alongside your accountant in the process.
Small business owners are already busy enough. Sometimes their time should be focused on other aspects of their business. Accounting professionals can assist in organising their forecasts. Talk to your bank accountant or small company lender to get help addressing problems with growing a small business before they become a problem. It’s best to seek help when you realize you’ll need it, rather than to bury your head in the sand hoping the issues will go away.
You don’t need to be an accountant to develop or manage an accurate financial forecast for cash flows. But you do need to ensure it is a regular and consistent part of your business’s planning. In uncertain times such as a global pandemic that is now more critical than ever before for small business owners to build resilience into their businesses and one of the most powerful ways to do that is cash flow forecasting.
