A step by step guide to cash flow forecasting

At a glance:

The management of cash flow shouldn’t be difficult however it’s more than an occasional glance at your business’s bank account.

Getting a handle on the flow of cash lets you make the most of opportunities, such as purchasing new equipment, hiring additional staff, or taking advantage of a discount.

Getting paid on time is crucial to ensure cash flow , so don’t let your creditors get in the way.

Heads up: looking at your bank account every week doesn’t mean you’re forecasting cash flow.

Small-scale business owners overwhelmed by the idea of making a cash flow forecast will frequently believe that just a glance at the bank account will accomplish the task.

It’s essential for small business owners to realize that cash flow forecasting is quite straightforward and, rather than complicating things, can help make running your business easier and your chances of success higher.

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

1. Learn about cash flow

In simple terms the cash flow calculation is based on your payments into and out which is what you owe and what you have in the bank less what you are owed.

An cash flow prediction will show you exactly how much you have in terms of available liquid funds.

The money you pay in will mostly comprised of sales. Your payments out will include expenses like wages, rent and utilities, tax, and supplier payments.

2. Learn why it’s important

If you can keep a grip on your cash flow you can manage your business more effectively and efficiently.

Many small-scale businesses have inventory and require what they need in their inventory and if they should purchase in bulk, for example.

If you’re not forecasting your cash flow accurately, you won’t be able to manage your stock on hand , or profit from opportunities when it is available - discounts on orders like that or the ability to purchase a brand new asset.

Forecasting cash flows could provide you with an understanding of the possibility of capital expenditure and warranted at any moment and also help you use your funds to their fullest potential.

3. Be prepared 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 shift away from keeping your business ticking over simply, to needing to keep an eye on the fluctuation of cash flow.

It’s critical to plan ahead. If, for instance, you haven’t managed your cash flow, you may run out of stock and not in a position to purchase. I’ve also seen people who finance their purchase of stocks using personal credit cards, which can result in a high-cost cycle that is difficult to come out of.

Pre-planning is also important when it comes to the accuracy of budgeting for the flow of cash.

Take into consideration things like the requirement for additional staff, or seasonal need for stock. Be sure to take note of your taxes, which include GST and PAYE – that’s an area where small-sized companies are caught repeatedly.

4. You can use the Chase option to make your payments

It is suggested that small-scale businesses collect the payment for invoices as fast as they can.

It isn’t easy to recover a debt. Chase instalments that have not been paid promptly rather than waiting for them to accumulate.

Invoices that are not paid can cause serious problems for your business, and can affect everything from the ability to replenish stocks, or reduce the advertising budget or branding.

Find out what you’re owed by checking in with an annual cash flow plan regularly - each week is ideal every month, at the very least. If you don’t know the current situation it’s difficult to prepare for the future.

5. Do you feel stuck? Don’t go it alone.

Most accounting software like Xero and MYOB has cash flow forecasting capabilities that business owners can use. It’s beneficial to keep business owners aware the flow of cash it’s not a bad idea to consider doing a monthly update with your accountant part of the process.

Small-scale business owners are often working enough and their time could be better used on other areas of their businesses. Accounting experts can help organise their forecasting. Talk to your bank accountant or business loan provider for help with the growing issues of small businesses prior to them becoming a problem. It’s better to get help immediately if you think you may need it rather instead of burying your head in the sand, hoping things will get better.

You don’t have to be an accountant to develop or manage an accurate Cash flow projection. However, you must make it a frequent and consistent element of your business planning. In uncertain times such as a global pandemic, it’s more important than ever for small business owners to build resilience into their businesses and one of the most powerful ways to do that is through cash flow forecasting.