A quick guide to cash flow forecasting

In a glance:

Cash flow management should not be complicated but it’s more than a quick glance at your business bank account.

Being aware of your cash flow allows you to benefit from lucrative opportunities – think buying an item that’s new, hiring additional employees, or making use of the discount.

Being timely paid is essential to maintain cash flow so don’t let your debtors hold you back.

Beware: checking your bank account at least once a week doesn’t mean you’re forecasting cash flow.

Small-scale business owners overwhelmed by the idea of making an annual cash flow forecast often convince themselves that just a glance at their bank account will suffice.

It’s crucial for small entrepreneurs to be aware the importance of cash flow forecasting. It’s easy to understand and, instead of complimenting things, it can simplify running your business and your chances of success higher.

These are the top tips for cash flow forecasting as a professional.

1. Understand what cash flow is

Put simply it is according to your payment out and in - what you are owed and have in your account, less what you have to pay.

The cash flow projection will provide you with the exact amount you have in terms of liquid funds available.

The money you pay in will mostly comprised of sales, while your payment out will cover expenses such as rent, wage, taxes, as well as supplier payments.

2. Find out why it is important

When you have a handle on your cash flow you can run your business efficiently and profitably.

A lot of small-scale businesses keep stocks, and they need to know what they need in stock and whether they need to purchase in bulk, for instance.

If you’re not forecasting your cash flow in a timely manner, you won’t be able to control your inventory on hand or profit from a good opportunity when it is available - discounts on orders, for instance or the ability to buy a new asset.

A cash flow forecast can help you understand whether capital expenditure is possible and warranted at any moment and also help you use your funds to the maximum potential.

3. Be prepared to grow

When you start out in business you will notice that the changes from growth may sneak up on you – including the transition of being capable of keeping your firm running at a steady pace while keeping watch on fluctuations in cash flow.

It’s essential to prepare ahead. For instance, if you’re not managing your cash flow you can find yourself in a stock shortage and not be capable of purchasing. I’ve also witnessed corporate owners finance stock purchases using personal credit cards, which could be a costly cycle that’s hard to break out of.

It is important to plan ahead in order to ensure effective budgeting for the flow of cash.

Be aware of things like the need for staffing, or the seasonal demand for stocks. Also, don’t forget to think about tax obligations , including GST and PAYE – that’s one area of expense that small businesses get caught out repeatedly.

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

It is recommended that small-scale business owners pay their invoices as soon as possible.

It is often difficult to get back a late payment. Chase accounts that are unpaid immediately instead of let them linger.

Unpaid invoices can sometimes cause serious problems for your business, affecting everything from replenishing stocks to having to cut back on your branding or advertising budget.

Know what you’re owed by checking an annual cash flow plan every week - each week is ideal each month, or once at minimum. If you don’t know what’s happening then you’re not able to properly plan for what’s ahead.

5. Do you feel stuck? Don’t try to solve it on your own.

Most accounting software like Xero and MYOB provides the capability of forecasting cash flow that entrepreneurs can make use of. While it’s an excellent idea to keep business owners at the top the flow of cash, there’s nothing wrong with making a monthly update alongside your accountant part of the process.

Small business owners are working enough and their time can be better spent on other aspects of the business and accountants can help organise their forecasting. Contact your bank’s accountant or small company loan provider to get help addressing small business growing pains prior to them becoming a problem. It’s better to get help as soon as you think that you’ll require it instead of burying your heads in the sand and pray that your problems will disappear.

There is no need to be an accountant to prepare or oversee a financial forecast for cash flows. But you do need to make it a frequent and constant part of your business’s plan. In uncertain times such as the global pandemic, it’s more important than ever for small-scale entrepreneurs to instill resilience into their companies and one of the more powerful ways to do this is cash flow forecasting.