A guide to cash flow forecasting

At a glance:

  • Managing cash flow needn’t be complicated, but it requires more than an occasional glance at your business bank account.
  • Getting a handle on cash flow enables you to take advantage of valuable opportunities – think buying a new asset, employing extra staff, utilising a discount.
  • Getting paid on time is critical to maintaining cash flow so don’t let your debtors drag.

Heads up: looking at your bank account once a week isn’t cash flow forecasting.

But, as Business Solutions owner Debbie Marshall has observed, small business owners overwhelmed with the idea of creating a cash flow forecast will often convince themselves that a quick glance at the bank account will do the trick.

It’s important for small business owners to understand that cash flow forecasting is quite straightforward and, rather than complicating things, can help make running your business easier and your chance at success greater.

Here Debbie shares her top tips for cash flow forecasting like a pro.

1. Understand what cash flow is

Put simply, cash flow is calculated based on your payments in and your payments out – what you are owed and have on hand, less what you owe.

"A cash flow forecast will show you exactly how much you have in the way of available liquid funds," says Debbie.

Your payments in will be mostly made up of sales, while your payments out will include expenses like wages, rent and utilities, tax, and supplier payments.

2. Know why it matters

When you have a handle on your cash flow you can run your business more efficiently and successfully.

"Many small businesses carry stock and need to know how much they should have on hand and whether they should buy in bulk, for instance," explains Debbie.

If you’re not forecasting your cash flow correctly, you won’t be able to manage your stock on hand or make the most of a good opportunity when it comes your way – a discount on an order, for instance, or being able to buy a new asset.

A cash flow forecast could help you understand whether capital expenditure is possible and warranted at any time, and help use your funds to their greatest potential.

3. Be ready for growth

When you start out in business, the changes that come with growth can sometimes creep up on you – including the shift from being able to keep the business ticking over simply, to needing to keep a close eye on fluctuating cash flow.

"I’ve seen business owners finance stock purchases on personal credit cards, which can be an expensive cycle that’s difficult to get out of."

"It’s critical to plan ahead," says Debbie. "For example, if you haven’t managed your cash flow you can end up out of stock and not able to purchase. I’ve also seen business owners finance stock purchases on personal credit cards, which can be an expensive cycle that’s difficult to get out of."

Pre-planning is also important when it comes to successful cash flow forecasting.

"Consider things like the potential need for extra staff, or seasonal demand for stock. And don’t forget your tax obligations including GST and PAYE – that’s one area of expense that I’ve seen small businesses caught out by time and time again."

4. Chase your payments

Debbie advises small business owners to collect payments for invoices as soon as possible.

"It can be very difficult to recover an outstanding payment. Chase unpaid invoices immediately rather than letting them drag out."

Unpaid invoices can sometimes have a serious impact on your business, affecting anything from the ability to replenish stock, to having to cut back on your advertising or branding budget.

Know what you’re owed by checking in with your cash flow forecast regularly – each week is ideal, once a month at minimum. If you don’t know where things stand, you can’t properly plan for what’s ahead.

5. Feeling stuck? Don’t go it alone.

Most accounting software like Xero and MYOB has cash flow forecasting capabilities that business owners can use. And while it is a good idea for business owners to be on top of their cash flow themselves, there’s nothing wrong with making a monthly update alongside your accountant part of the process.

"Small business owners are busy enough – sometimes their time is better spent on other aspects of the business and accountants can help organise their forecasting," says Debbie. "Talk to your bank accountant or small business lender to get help addressing small business growing pains before they become an issue. It’s better to get help as soon as you think you might need it than to bury your head in the sand and hope the problems will go away."

You don’t need to be an accountant to create or manage a cash flow forecast. But you do need to make it a frequent and consistent part of your business planning. During uncertain times like a global pandemic, it’s more important than ever for small business owners to build resilience into their businesses and one of the most powerful ways to do that is cash flow forecasting.

The information on this website is provided for general information only and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from financial, legal and taxation advisers. Although every effort has been made to verify the accuracy of the information, we disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy, or omission from the information or any loss or damage suffered by any person directly or indirectly through relying on this information.

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