A step by step guide to cash-flow forecasting

In a glance:

Cash flow management shouldn’t be complicated however, it takes more than a glance at your business bank account.

Being aware of cash flow enables you to make the most of opportunities – think buying new equipment, hiring additional employees, or making use of discounts.

Being timely paid is vital to keep cash flow . Don’t let your debtors get in the way.

Heads up: looking at your bank account at least once a week isn’t cash flow forecasting.

Small-scale business owners who are overwhelmed by the idea of making a cash flow forecast will typically believe that only a glance over the bank account will do the trick.

It’s important for small business owners to realize that forecasting cash flow is very simple and, instead of complimenting things, can simplify running your business and your chance at success higher.

We’ve got the best advice to forecast cash flow like a pro.

1. Know what cash flow is.

In simple terms, cash flow is calculated based on your payments in and your payments out which is what you owe and have in cash less what you have to repay.

An cash flow prediction can show you exactly how much you have in the way of liquid funds available.

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

2. Learn why it’s important

When you have a handle of your cash flow, you are able to run your business more efficient and effectively.

Small businesses often have stocks, and they need to know how much they should have in their inventory and whether they can purchase in bulk, for instance.

If you’re not planning your cash flow accurately it will be difficult to manage your stock on hand or take advantage of the opportunity that arrives – such as discounts on orders for instance, or being able to purchase a brand new asset.

A cash flow forecast could help you understand whether capital expenditures are feasible and warranted at any moment and will help you utilize your funds to their greatest potential.

3. Be ready for growth

When you first start your business it is possible that the changes that come with growth might sneak into your life – for example, the shift away from keeping your firm running at a steady pace while keeping watch on fluctuations in cash flow.

It’s crucial to think ahead. For example, if you haven’t managed your cash flow, you could find yourself running out of stocks and be capable of purchasing. I’ve also witnessed corporate owners finance stock purchases using personal credit cards. This could be a costly cycle that’s hard to get out of.

It is important to plan ahead in order to ensure effective cash flow forecasting.

Be aware of things like the need for staffing, or the seasonal need for stock. Also, don’t forget to think about tax obligations including GST and PAYE – that’s an area where small companies get caught by time and time again.

4. Make sure you are able to track your payments

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

It is often difficult to get back a late payment. Chase instalments that have not been paid promptly instead of waiting for them to accumulate.

Unpaid invoices can sometimes be a major problem for your business, and can affect everything from the ability to replenish stocks, or reduce the budget for advertising and branding.

Make sure you know what you’re due by checking in with your forecast for cash flows regularly - each week is ideal, once a month at a minimum. If you’re not sure where things stand and how they’ll change, it’s impossible to make a proper think about what’s to come.

5. Feeling stuck? Don’t be alone.

A majority of accounting software, such as Xero and MYOB offers cash flow forecasting features that business owners can benefit from. While it’s an excellent idea for business owners to stay on top the flow of cash themselves but there’s nothing wrong with creating a monthly update along with your accountant as part of the process.

Small-scale business owners are often too busy – often their time should be to be spent on other aspects of their businesses. Accounting experts can assist with their forecasting. Speak to your bank’s accountant or small business lender to get help addressing problems with growing a small business before they become a problem. It is better to seek help immediately if you think you might need it instead of sticking your head in the sand and hope things will get better.

You don’t have to be an accountant to create or manage the financial forecast for cash flows. However, it is important to make it a frequent and constant part of your business’s planning. In times of uncertainty, such as an epidemic that is spreading across the globe and a global pandemic, it’s more essential than ever for small-scale entrepreneurs to instill resilience into their companies and among the most effective methods to achieve this is through cash flow forecasting.