A step by step guide to cash-flow forecasting

At a glance:

The management of cash flow does not have to be difficult however it’s more than a glance at your company’s bank account.

A good understanding of the flow of cash lets you take advantage of valuable opportunities such as buying an asset that is new, hiring extra staff, utilising a discount.

Getting paid on time is critical to maintaining the flow of cash, so don’t allow your debtors drag.

A heads up: checking your bank account at least once a week isn’t cash flow forecasting.

Small business owners who are overwhelmed by the thought of creating an annual cash flow forecast often think that a quick glance at the bank account will be enough to get the job done.

It is crucial for small-scale business owners to realize that cash flow forecasting is simple and, rather than complicating things, can simplify running your business and your chances of being successful is higher.

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

1. Understand what cash flow is

In simple terms it is using your transactions into and out that you owe and have in your account in cash, less the amount you owe.

An cash flow prediction will provide you with the exact amount you have in terms of available liquid funds.

The money you pay in will mostly made up of sales. However, your payment out will cover expenses such as rent, wage, utilities, tax, and supplier payments.

2. Learn why it’s important

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

Many small businesses carry stocks and must know how much they should have in their inventory and whether they can purchase in bulk, as an example.

If you’re not forecasting your cash flow accurately, you won’t be able to effectively manage your stocks on hand or profit from a good opportunity when it is available - 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 provide you with an understanding of whether capital expenditure is possible and warranted at any moment and also help you use your funds to their fullest potential.

3. Be prepared to grow

When you first start your business it is possible that the changes that come with growth might sneak into your life – for example, the transition between being in a position to maintain your firm running at a steady pace, to needing to keep a close eye on fluctuating cash flow.

It’s critical to plan ahead. For instance, if you’ve not managed your cash flow you can be out of stock and not capable of purchasing. I’ve also seen people who finance their purchase of stocks using personal credit cards, which can result in a high-cost cycle that’s very difficult to break out of.

Planning is crucial for effective cash flow forecasting.

Consider things like the potential demand for more staff or seasonal demand for inventory. Don’t forget about your tax obligations , including PAYE and GST – that’s one expense area that small-sized companies are caught by time and time again.

4. Chase your payments

It is advised that small businesses collect the payment for invoices as fast as they can.

It can be difficult to get back a late payment. Chase unpaid invoices immediately instead of letting them drag out.

Invoices not paid may be a major problem for your business, affecting anything from replenishing stocks, to having to reduce your advertising or branding budget.

Make sure you know what you’re due by checking your forecast for cash flows regularly Each week is the ideal and once per 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. Do you feel stuck? Don’t be alone.

A majority of accounting software, such as Xero and MYOB offers cash flow forecasting features that entrepreneurs can make use of. It’s recommended for business owners to stay on top the flow of cash themselves it’s not a bad idea to consider having a monthly report with your accountant in the process.

Small-scale business owners are often too busy – often their time is better spent on other aspects of their business. Accounting professionals can assist with their forecasting. Talk to your bank accounting professional or small-business loan provider for help with the growing issues of small businesses before they become an issue. It’s better to seek assistance when you realize you’ll need it, rather 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 budget for your cash flow. But you do need to make it a regular and constant part of your business’s plan. In times of uncertainty, such as an outbreak in the world that is now more critical than ever for small business owners to incorporate resilience into their business and among the most powerful methods to achieve this is cash flow forecasting.