A quick guide to cash flow forecasting
A quick glance:
Controlling cash flow needn’t be complicated, but it requires more than a quick glance at your company’s bank account.
A good understanding of your cash flow allows you to benefit from lucrative opportunities, such as purchasing new equipment, hiring additional employees, or making use of discount.
When you pay on time, it is crucial to ensure cash flow so don’t let your debtors hold you back.
Heads up: looking at your bank account at least once a week isn’t forecasting your cash flow.
Small-scale business owners who are overwhelmed by the thought of creating the cash flow forecast frequently believe that a quick glance at the bank account can do the trick.
It’s important for small entrepreneurs to be aware that forecasting cash flow is simple and, rather than complicating things, can simplify running your business and your chance at succeeding higher.
Here are our top recommendations for forecasting cash flow like a pro.
1. Understand what cash flow is
In simple terms the cash flow calculation is based on your payments into and out - what you are owed and have in cash, less what you are owed.
An cash flow prediction will reveal exactly how much you have in terms of liquid funds available.
Your payments in will be mostly comprised of sales, while your payment out will cover expenses like rent, wages, taxes, as well as supplier payments.
2. Be aware of the reasons why it’s important
If you can keep a grip of your cash flow, you can run your business more effectively and efficiently.
A lot of small-scale businesses keep stock and need to know what they need on hand and whether they should buy in bulk, like.
If you’re not planning your cash flow in a timely manner it will be difficult to effectively manage your stocks available or make the most of an opportunity that occurs – like for instance, a price reduction on an order for instance or being able to buy a new asset.
A cash flow forecast can help you understand whether capital expenditure is feasible and is warranted at any point and will help you utilize your funds to the maximum potential.
3. Be ready to expand
When you start out in business you will notice that the changes with growth can sometimes creep into your life – for example, the change away from keeping your company running smoothly and not needing to keep an eye on changing cash flow.
It’s essential to prepare ahead. If, for instance, you don’t manage your cash flow, you may run in a stock shortage and not be being able to buy. I’ve also witnessed corporate owners finance purchase of stock using personal credit cards. This could be a costly cycle that’s hard to come out of.
Pre-planning is also important when it comes to effective financial forecasting.
Be aware of things like the requirement for additional staff, or seasonal need for stock. Be sure to take note of your tax obligations , including the PAYE and GST. That’s one area of expense that 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 collect payments for invoices as soon as they are able to.
It can be very difficult to recover a debt. Chase the invoices that are not paid immediately rather than taking them off.
Invoices not paid may be a major problem for your business, and can affect everything from the ability to replenish stocks, or reduce your advertising or branding budget.
Make sure you know what you’re due by reviewing an annual cash flow plan every week - each week is ideal every month, at minimum. If you’re not aware of what’s happening and how they’ll change, it’s impossible to make a proper think about what’s to come.
5. Are you feeling stuck? Do not be on your own.
Most accounting software like Xero and MYOB includes the ability to forecast cash flow, which business owners can use. And while it is beneficial to keep business owners on top of their cash flow themselves, there’s nothing wrong with having a monthly report with your accountant part of the process.
Small business owners are working enough and their time is better to be spent on other aspects of the business and accountants can help organise their forecasting. Speak to your bank’s accountant or small business lender to find solutions to problems with growing a small business before they become a problem. It is better to seek help immediately if you think that you’ll require it instead of burying your heads in the sand hoping things will get better.
It doesn’t require an accountant to develop or manage the financial forecast for cash flows. However, you must make it a frequent and consistent element of your business plan. In times of uncertainty, such as an epidemic that is spreading across the globe that is now more critical than ever for small business owners to incorporate resilience into their businesses and One of the most powerful methods to achieve this is cash flow forecasting.
