At some point in its lifetime (probably like right now!!), every small business suffers from cash flow problems. Given the current situation we are in with unexpected lockdowns and government policy, cash flow forecasts will play a vital role in predicting and planning your future and your businesses future.
To effectively manage your cash flow, all you have to essentially do is use your sales and expenses figures to calculate your cash flow figures before they happen. Then you can plan to limit the impact of a cash drought before it arrives, so you can still pay your staff, the bank and your suppliers.
Cash flow forecasts are used to predict your business’s future financial position for the period ahead, from three months to a year in advance. Your forecast allows you to see what money you expect to be paid into the business and the amount you’ll need to pay out. It’s a useful tool to help you manage your business more effectively and plan accordingly.
In summary, your cash flow forecast gives you a future view into your business finances. It helps you identify cash flow problems before they appear and allows you to make informed business decisions.
How to create a cash flow forecast
You can use your cloud accounting package, a spreadsheet program such as Excel, or download a cash flow forecast template from the Internet to calculate your cash flow forecast. Most accounting packages will be able to pull up many of the figures you need to put into your forecast directly from your accounts, saving time and effort.
Step one
Enter your opening bank balance, which reflects the amount of cash you have on hand.
Step two
Identify the money coming into your business over the next 12 months (most forecasts cover the year ahead). This could be credit sales you’ve already made, any forward orders you’ve received, and projections of future sales based on past performance or market research or grants. You might adjust these slightly by increasing or decreasing them by 10%, or a similar percentage, to allow for anticipated growth or tighter market conditions.
Step three
Record the expenses you’ll need to pay each month. This will include your overheads or fixed costs, your variable or operating costs, any one-off purchases and annual payments, plus any money you’re likely to draw from the business.
Step four
Add your income to your opening bank balance and subtract your expenses. This is your closing bank balance each month – repeat for the year and you’ll have an appreciation of your business’s likely cash position for the year ahead.
If your forecast bank balance at the end of each month is positive, you have sufficient cash flowing into your business to meet your expenses. If your bank balance is negative, you’ll need to source additional finance to keep your business running, and look at ways to increase sales, reduce costs, or both.
The hardest part of creating a cash flow forecast is working out accurate income and expense figures for the months ahead. Obviously, the more accurate these figures are, the more accurate your forecasts will be (and the business decisions you base on them).
For your forecasts to continue to be of use, you need to update them based on your actual business performance each month. Replace your forecast figures with the actual figures for the month and make adjustments to the next few months’ forecast figures if it appears, based on reality, that your projections were either overly optimistic or pessimistic.
Putting your forecasts to use
Apart from giving you a fairly good indication of your likely cash position at any point in time in the year ahead and alerting you to potential cash flow problems (which enables you to act in advance, rather than react), your cash flow forecasts can be used to model your future plans.
You can run three versions of this forecast: a worst-case, best-case and middle-of-the-road scenario to see how this will affect your business finances. If you’re uncertain you’ll achieve your best-case sales or your middle-of-the-road figures don’t look that promising, these forecasts will help you decide the options you may or may not have available at the end of the period according to your business plan.
Once you have your forecasts set up, use them to model “what if” questions about your business to help you make the best decisions for your business. Look to your accountant, business coach mentors or your colleagues to seek assistance or advice.
Your Business First is a team of experienced business advisors and mentors that provides a support network to business owners who are looking to grow their business, improve efficiency or increase profitability. For more information refer to www.yourbusinessfirst.com.au
