A quick guide to cash-flow forecasting
At a glance:
Managing cash flow does not have to be complicated, but it requires more than an occasional glance at your bank account for business.
A good understanding of the flow of cash allows you to profit from opportunities – think buying an asset that is new, hiring additional staff, or taking advantage of a discount.
Getting paid on time is critical to maintaining the flow of cash, so don’t allow your debtors drag.
Heads up: looking at your bank account every week isn’t forecasting your cash flow.
Small business owners who are overwhelmed by the thought of creating an annual cash flow forecast often convince themselves that just a glance at the bank account can do the trick.
It’s essential for small entrepreneurs to be aware the importance of cash flow forecasting. It’s very simple and, rather than complicating things, it can make running your business easier and your chances of succeeding higher.
Below are some of our best suggestions for cash flow forecasting as a professional.
1. Understand what cash flow is
Simply put, cash flow is calculated using your transactions into and out - what you are owed and have on hand and what you have on hand, less what you are owed.
The cash flow projection can give you an exact estimate of how much you have in the way of liquid funds available.
The money you pay in will predominantly comprised of sales, while your cash outs will also include costs such as rent, wage, taxes, as well as supplier payments.
2. Know why it matters
If you can keep a grip on your cash flow , then you can manage your business more efficiently and profitably.
Many small businesses carry inventory and require what they need in their inventory and whether they can purchase in bulk, like.
If you’re not forecasting your cash flow correctly it will be difficult to control your inventory on hand or profit from an opportunity that occurs – like a discount on an order for instance, or being able to purchase a new asset.
An accurate cash flow projection can provide you with an understanding of whether capital expenditure is possible and is warranted at any time, and help use your funds to their greatest potential.
3. Be prepared to expand
If you are just beginning your career in business and grow, the changes that come with growth can sometimes creep over you, including the transition away from keeping the business ticking over simply while keeping an eye on changing cash flow.
It’s crucial to think ahead. If, for instance, you’re not managing your cash flow you can find yourself in a stock shortage and not be capable of purchasing. I’ve also seen businesses finance stock purchases using personal credit cards. This can be an expensive cycle that is difficult to escape from.
Pre-planning is also important in the process of effective cash flow forecasting.
Consider things like the potential need for extra staff, or the seasonal demand for stocks. Be sure to take note of your tax obligations , including the PAYE and GST. That’s an area where small businesses get caught out often and repeatedly.
4. You can use the Chase option to make your payments
It’s advised that small entrepreneurs collect their payments for invoices as fast 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 letting them drag out.
Invoices that aren’t paid can sometimes cause serious problems for your business, and can affect everything from the ability to replenish stocks to having to cut back on the advertising budget or branding.
Know what you’re owed by checking the cash flow projection frequently Every week is ideal each month, or once at the very least. If you don’t know where you stand and how they’ll change, it’s impossible to make a proper prepare for what’s coming up.
5. Do you feel stuck? Don’t go it alone.
Many accounting programs like Xero and MYOB provides cash flow forecasting capabilities that entrepreneurs can make use of. It’s beneficial for business owners to stay aware on their money flow themselves but there’s nothing wrong with having a monthly report with your accountant as part of the process.
Small-scale business owners are often already busy enough. Sometimes their time could be better focused on other aspects of their business. Accountants can assist with their forecasting. Contact your bank’s accountant or business lender for help with small business growth issues before they become an issue. It is better to seek help whenever you feel you may need it rather instead of sticking your head in the sand hoping the problems will go away.
You don’t have to be an accountant to develop or oversee an accurate 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 an epidemic that is spreading across the globe and a global pandemic, it’s more essential than ever for small entrepreneurs to instill resilience into their business and one of the most powerful ways to do that is through cash flow forecasting.
