The importance of cash flow forecasting
Most businesses at some point will suffer from cash flow problems. The key to avoiding them is to plan ahead and pinpoint when cash flow issues may arise, so you’re not caught out. Cash flow is the amount of money that goes in and out of a business. Cash flow forecasting for your business is so important, and it’s simple. Essentially all your doing is using your previous sales and expenses to calculate your forward-looking cash flow. Doing this helps you to easily identify issues before they arise so you can plan a way to continue to pay your expenses e.g. staffing costs, supplier costs etc.
How to do a cash flow forecast
The best way to forecast a cash flow is by using a digital bookkeeping tool, I recommend QuickBooks. By inputting all of your income and expenses into the tool, ensuring all assets and liabilities are recorded, checking all of your details in your income statement are correct and your bank account is reconciled. It’s as simple as 5 simple clicks to view your cashflow forecast.
Reports > All Reports > Statement of cashflows > Select the time period> View the report.
I highly recommend QuickBooks to all my clients, it’s simple to use and keeps everything in one place. If you want to take full control of your finances, QuickBooks is the key, contact me for a discounted subscription.
You may not be able to invest in a digital tool at the stage your business is at. Don’t worry, you can manually forecast your cashflow using my Excel forecasting tool. Simply download the tool and follow these 3 easy steps.
- Enter your opening bank balance.
- Identify & input your monthly business income for the next 12 months.
- Input your monthly expenses.
Forecasting your income & expenses for the next 12 months can be challenging. I would recommend you review your income for the previous year then consider the likely changes for the year ahead. For example, if your sales have been increasing by an average of 5% each month for the previous year. Start your first forecasted month at 5% above the same month in the previous year, then continue each month adding 5%.
Example
Jan 2022 income – 10,000
Average monthly income change – 5%
Jan 2023 forecast – 10,000 + 5% = 10,500
Feb 2023 forecast – Jan 23 forecast (10,500) + 5% = 11,025
It’s also important to factor in things you know will happen, for example, you’re attending an event later in the year where you’ll sell your products and services and sales for that month will increase.
Important – It’s important to keep your cash flow accurate so go back to it each month and input ACTUAL figures.
What to do when you have your forecast
Once your forecasts are set up, it’s time to review them and pinpoint potential issues. Follow these 3 simple steps.
- Plan for upcoming expenses – If there’s a month where you’re expected to hit a cash flow issue review whether you can set aside funds or reduce expenses to help your cash flow remain consistent. You may also consider a business line of credit to ensure you have access to funds.
- Review your income – Figure out ways to increase your income, this could come from more sales or charging more for your product or services.
- Review your payments – here you could review your payments to suppliers, and potentially look to negotiate a longer term payment plan. For example, if you currently pay for supplies within 30 days of invoice, negotiate a 60-day payment term and split the expense in half over 2 months.
If you’d like help
Take a look at our packages. You can also schedule a FREE business finance clinic session; you can ask any questions you may have about your business finances.