A quick guide to cash-flow forecasting
A quick glance:
The management of cash flow does not have to be difficult, but it requires more than a quick glance at your business bank account.
Controlling cash flow enables you to benefit from lucrative opportunities such as buying an asset that is new, hiring extra staff, utilising discount.
Getting paid on time is vital to keep the flow of cash, so don’t allow your creditors hold you back.
A heads up: checking your bank account every week isn’t cash flow forecasting.
Small-scale business owners overwhelmed by the idea of making an annual cash flow forecast frequently believe that just a glance at their bank account can suffice.
It’s essential for small business owners to understand the importance of cash flow forecasting. It’s very simple and, instead of complimenting things, it can in making running your business more efficient and the chances of success higher.
Here are our top recommendations to forecast cash flow like a pro.
1. Understand what cash flow is
Simply put, cash flow is calculated using your transactions out and in which is what you owe and have in your account less what you have to pay.
Cash flow estimates can show you exactly how much you have in terms of liquid funds.
The money you pay in will mostly comprised of sales, whereas your payments out will include expenses such as rent, wage, taxes, as well as supplier payments.
2. Learn why it’s important
If you have a grasp on your cash flow you can manage your business more efficient and effectively.
Many small businesses carry inventory and require what they need in stock and if they should purchase in bulk, for example.
If you’re not planning your cash flow in a timely manner and accurately, you’ll not be able to control your inventory on hand or get the most out of an opportunity that arrives – such as the possibility of a sale on an order like that or the possibility to purchase a new asset.
An accurate cash flow projection will help you understand whether capital expenditures are feasible and warranted at any time and assist in utilizing your funds to their greatest potential.
3. Be ready for the future
When you first start your business you will notice that the changes as growth are often able to creep in on you. This includes the transition from being able to keep the company running smoothly and then needing to keep watch on fluctuations in cash flow.
It’s essential to prepare ahead. For example, if you’re not managing your cash flow, you may find yourself out of stock and capable of purchasing. I’ve also seen people who finance their stock purchases using personal credit cards, which can result in a high-cost cycle that is difficult to escape from.
Pre-planning is also important when it comes to accurate cash flow forecasting.
Take into consideration things like the requirement for additional staff, or the seasonal need for stock. And don’t forget your taxes, which include VAT and PAYE. This is one area of expense that small-sized businesses are caught often and repeatedly.
4. You can use the Chase option to make your payments
It is suggested that small-scale business owners pay their invoices as soon as possible.
It can be very difficult to recover a debt. Chase instalments that have not been paid promptly instead of let them linger.
Unpaid invoices can sometimes cause serious problems for your business, impacting everything from the ability to replenish stocks, to having to cut back on your branding or advertising budget.
Know what you’re owed by checking in with the cash flow projection every week every week, once a month at a minimum. If you don’t know where things stand then you’re not able to properly prepare for what’s coming up.
5. Are you feeling stuck? Don’t be alone.
Many accounting programs like Xero and MYOB offers the ability to forecast cash flow, which business owners can use. While it’s an excellent idea to keep business owners aware in their financial situation, there’s nothing wrong with creating a monthly update along with your accountant in the process.
Small business owners are working enough and their time should be to be spent on other aspects of their business. Accounting professionals can help organise their forecasting. Talk to your bank accountant or business lender for assistance in tackling small business growing pains prior to them becoming a problem. It’s better to get help as soon as you think you might need it instead of burying your heads in the sand and hope things will get better.
It doesn’t require an accountant to develop or oversee an accurate financial forecast for cash flows. But you do need to make it a frequent and regular part of your business’s plan. During uncertain times like the global pandemic, it’s more important than ever for small business owners to develop resilient businesses. And one of the more effective methods of doing this is by calculating cash flow forecasts.
