How to monitor and forecast your cashflow

A lot of business owners think they are managing their cashflow because they check their bank balance each morning. That is a start, but it only tells you where you are right now. What you really need is to know where you are heading.

Managing cashflow well comes down to two things: monitoring it properly and forecasting it ahead of time. Here is how to do both.

What cashflow monitoring actually means

Your bank balance tells you how much cash you have today. Your cashflow position tells you how money is moving through your business, what is coming in, what is going out, and what the net result is over time.

Monitoring cashflow properly means reviewing a cashflow statement regularly, not just the bank account. The cashflow statement shows you the actual movement of money through your business and why your balance has changed from one period to the next.

It also means understanding the events in your business that will affect cashflow, a large payment from a client coming in next week, a tax instalment due at the end of the month, a big supplier invoice sitting unpaid. Keeping track of those moving parts is what gives you real visibility.

Use Xero's cashflow statement and short-term cashflow tool as a starting point. Run them regularly and review them alongside your profit and loss and balance sheet to get the full picture.

Why forecasting changes everything

Monitoring tells you what is happening. Forecasting tells you what is coming. And the ability to see a cashflow problem three months before it arrives is enormously more useful than discovering it the week it hits.

A cashflow forecast pulls together your expected income, your expected expenses, your tax obligations, and your other financial commitments into a forward-looking view of your bank balance. When you update it regularly and keep it current, it becomes one of the most powerful tools you have.

What to include in a forecast

A useful cashflow forecast needs the following: expected revenue by month, debtor collection timing, cost of sales, fixed and variable overheads, tax payment dates, and any loan repayments or other known financial obligations. The inputs come from your budget and your Xero data.

The goal is not perfection. It is a reasonable projection that you can adjust as things change. When a client pays late, update the forecast. When a large unexpected cost comes in, update the forecast. The value is in maintaining a current picture of where things are heading, not in getting every number exactly right up front.

Three-way forecasting

The most robust approach to forecasting combines a profit and loss projection, a balance sheet projection, and a cashflow projection into a single model. Changes in one flow through to the others automatically, which means you can see the full impact of a scenario rather than just one dimension of it.

Several cloud-based tools connect to Xero and provide this kind of forecasting capability. The best one is the one you will actually use, so find something you understand and can keep current without it becoming a burden.