You’ve read it before: cash is king. It’s the lifeblood of a business. You know it.
You also know that your accounting system only tells you what’s happened previously. It doesn’t help with any sort of forecast or prediction of the future.
The advantages of a cashflow forecast are many. But, if you haven’t already incorporated these forecasts into your small business, it probably means that either:
- You’re not aware of all the benefits; or
- You don’t where to start
…or both of the above.
Budgeting and forecasting seem like huge tasks to set up and to keep relevant and up to date. So you don’t bother.
That means you’re missing out on all the cash flow forecast advantages for you and your business.
The following should clear up any doubts you have about the benefits and what you should include to make your own cashflow forecast most effective.
10 cashflow forecast advantages for a small business
A cashflow forecast is an extremely powerful tool when prepared properly.
It is about more than profit and loss or a balance sheet. The true power of a cashflow forecast lies in the ease of keeping it up-to-date and relevant.
If it’s too difficult to keep relevant, your cashflow forecast will quickly become an unused tool that you hear people rave about but that you just can’t ever seem to make work for you.
Make it simple enough and it can:
1. Help you plan for the highs and lows of your businesses cash needs.
2. Ensure your entire team knows where you’re going.
3. Enable you to adjust your plans based on the highs and lows of your business.
4. Ensure you don’t over-commit your resources.
5. Ensure you can make alternative funding arrangements if you can see a temporary shortfall.
6. Ensure you have the cash resources to fund a new project until it is cashflow positive itself.
7. Take away the pain of the unknown – creating more certainty in your life, your employees’ lives and your family’s lives.
8. Ensure that you remain realistic with your goals – and that they translate into an easily executable plan.
9. Work together with your business plan and incorporate your business plan’s goals.
10. Work with your accounting system, reflecting the realities like payments-made timeframes, payments-received timeframes.
If you create a framework for adjusting your cashflow forecast, it will become an easy-to-use and irreplaceable planning and management tool for your business.
But where should you start when you create yours?
What should your cashflow forecast include?
All cashflow forecasts need to include the following:
- Expected sales numbers
- Expected gross margins
- Expected overhead costs
- Expected inventory costs
- The average time it takes for your sales to be paid
- The average time it takes for your purchases to be paid
- The expected dates of tax payments – all types of tax payable, including FBT, GST, INC, etc.
- Your funding arrangements
These details will all flow from your profit and loss budget or from the existing trends on your balance sheet.
What is really important here is that you are able to easily update the components listed above.
Establish a cashflow forecast framework
A simple way to ensure that your forecast is easily updated is to establish a cashflow forecast framework specific to your business.
The purpose of this is to have a few easy-to-keep-track-of key metrics about your business that directly influence the cashflow components listed above.
In most businesses, some elements of the above cashflow forecast components will be relatively fixed.
For example, your tax obligation dates are usually fixed; your funding arrangements (if long term) are usually fixed for a 6-12 month period; and your overhead costs will be relatively fixed.
If this is the case, you can build those elements into your forecast fairly easily, based on your budget, current business trends or formulas built into your forecast.
In establishing your cashflow forecast framework, focus on the components that fluctuate most in your business.
These are often the trickiest to monitor and predict; and they also have the greatest impact on your cashflow.
This is made even more challenging because the most fluctuating components are influenced by non-financial data the most.
For example, the expected sales numbers. This depends on the market, right!? And there isn’t anything you can do about that, right?!
Well, to a certain degree that’s correct; but you can know more about your sales numbers than just the numbers.
For instance, what do they usually depend upon? Marketing, foot traffic, price points, ranging of goods sold or conversations with potential customers, number of proposals issued, your relationship with your potential customer, and so on.
Once you understand this, you can then use these metrics, often captured by systems you already have, to predict and tweak the sales numbers.
The clear advantages of a cashflow forecast
As you can see, the power of a cashflow forecast is really fuelled by the monitoring and measuring of both financial and non-financial data that impact your business.
Combining a cashflow forecast framework to focus on the areas that fluctuate the most with the budget and trends from your accounting system will ensure that you have a powerful cashflow forecast to guide you through your business seasons.
This will help you reap the many advantages of a cash flow forecast for your business.
Need further help with cashflow? Contact us here.