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When you run a business, it’s easy to be so bogged down in day-to-day operations that you can’t take a moment to look up, let alone look to the future.
However, if you want your organisation to succeed for the long term, reviewing your performance and creating a cash flow forecast which is updated on a regular basis is essential.
Here’s a look at what you need to know about this process:
What is a cash flow forecast?
First up, cash flow is the money coming in and out of your business.
- Incoming cash flow is mostly from sales of your services but might also be from things like the sale of assets and government rebates.
- Outgoing cash flow is the money going towards staff wages, bills, taxes and other expenses.
Ideally, your business will run with positive cash flow, meaning you have more coming in than going out. At the end of the day, every business, no matter how large or small, needs to have positive cash flow to survive for the long term.
Cash flow forecasting is an estimation of the state of your future cash flow, both incoming and outgoing. Without it, you can end up seriously behind and without measures in place to help you play financial catch up should the need arise.
Why do you need a cash flow forecast?
Completing a regular cash flow forecast is beneficial for a number of reasons:
- Peace of mind: With cash flow forecasting, you can put your mind at ease, knowing your business finances look set to keep ticking along. Even though a forecast is just that; you can at least be forewarned if it looks like there are storms on the horizon.
- Identify problems: If your cash flow forecast shows your business is about to come up short when it comes to paying suppliers or staying on top of your tax bill, you can put a proactive plan in place. Your cash flow forecast may reveal a gap in cash at some stage in the future, perhaps because of a seasonal downturn or a large investment expense. When you do your forecasting, you can arrange a loan or start putting funds aside to cover the shortfall. Conversely, your forecast may show that you’re expecting an influx of cash. If this is the case, you’ll have time to decide what to do with it.
- Increased confidence: A strong cash flow forecast is fantastic for stakeholders including investors, board members, partners, your team and even potential buyers. Of course, it will make you feel better as the business owner as well.
What is captured in a cash flow forecast?
There are a number of factors that need to be taken into account in order to create an accurate cash flow forecast.
The first will be your business’s past performance trends. Your previous cash flow results will help to indicate your future outcomes. If you have been working with an accountant to keep accurate records, looking back in time should be no problem.
Other factors to review include:
Cash inflow from sources such as:
- Starting cash balance
- Expected income from sales and services
- Tax refunds
- Grants
- Investment from shareholders or owners
- Royalties, rents or license fees
- Investment income from dividends or interest
Outflow, including estimated:
- Rent and leasing costs
- Wages and salaries
- Purchases and raw materials
- Asset ownership costs
- Bank loans, fees and charges including increased installments
- Marketing and advertising expenses
- Dividend payments to shareholders
- Insurance
- Tax and GST
- Superannuation
You’ll also look at what’s coming up in the calendar; for example is there a big event that will help generate sales or do you have a staff superannuation bill coming up?
The more detail you include, the more accurate your cash flow forecast will be and the easier it will be to see what’s in store for the year ahead.
As mentioned, it’s impossible to see the future with 100 per cent clarity. Doing a cash flow forecast and having it miss the mark will give you a reminder to always put funds away for a rainy day.
How often should you do a cash flow forecast?
Many experts advise that you update your cash flow forecasts monthly at the very least and weekly if possible, but even a quarterly review is better than nothing.
It’s important for smaller business to frequently update cash flow forecasts too. This is because small business are often more vulnerable to negative impacts of cash shortfalls.
Who can help with a cash flow forecast?
Your accountant is your first port of call to get into a good habit of cash flow forecasting. They can help you set up a spreadsheet or know which line items to look at in your accounting software or financial dashboard.
A monthly touch-base with your accountant and an in-depth quarterly cash flow forecast session are ideal. This way, you can prepare yourself for the road ahead. The benefit of working with an accountant is that you will be able to spot financial red flags early and ensure they don’t take your business by surprise. You can figure out the best way to navigate cash flow shortfalls and ensure smoother sailing for your business.
Need a quality accountant to help you create a cash flow forecast and stay in control of your business finances? Reach out to Crest Accountants today.
Disclaimer: The information contained in this news post is general in nature and is intended to provide a general summary only and should not be relied on as a substitute for professional advice. Whilst the information is considered to be true and correct at the date of publication, changes in circumstances after the time of publication may impact upon the accuracy of the information.
