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August 15, 2018

How Cash Flow Forecasting improves business growth

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Peter Hetherington
Cash Flow Forecasting

Cash Flow Forecasting – How to use forecasting in your business to reduce stress and improve growth potential

If there’s one tool or process we recommend to all our clients, whether they’re in the early stages of their business or it’s been running for decades, is to include cash flow forecasting in their business planning.

Cash flow forecasting is the perfect approach to improve your awareness around the timing of cash inflows and outflows in your business. And this awareness helps you reduce the stress that is often associated with managing business finances.

Cash flow problems are often a factor in why some businesses fail. A profit on your P&L doesn’t always paint an accurate picture of how your business fared throughout the year. It’s only when you look at the cash position on a weekly or monthly basis that you can see a true reflection of financial health from an operational perspective.

What Is Cash Flow Forecasting?

A cash flow forecast is a projection of cash inflows and outflows that you expect in your business over a specific time period. A forecast is usually done for a 12-month period showing the cash flows for each month.

Some business owners find it difficult to prepare cash flow projections due to the uncertainties in running a business. But with the right research and review of historic trends, cash flow forecasting can be a valuable tool. It helps in getting to the bottom of how your business operates and sets you up for success in the future.

An expertly prepared cash flow forecast gives you the confidence of knowing you can meet ongoing commitments, and also allow for growth.

How Can Cash Flow Forecasting Build Growth In My Business?

Having in-depth knowledge of your business finances gives you an edge. It puts you in a proactive position to take advantage of growth opportunities or even just to know when it’s time to concentrate on ‘business as usual’.

A cash flow forecast supported by reasonable assumptions gives you advance notice of surpluses or shortfalls, and identifies issues before they become major problems. This knowledge can drive effective Decision Making That Benefits Your Business And Is Especially Helpful When Considering Growth And expansion opportunities. This along with improving profitability can ensure the long term sustainability of your business.

How to Prepare your Cash Flow Forecast

1. Estimate your Income

Remember that your cash flow forecast is all about timing. Allocate your income when you expect it to be paid.

  • Look at last year’s sales figures and make some assumptions about the next 12 months
  • Consider past trends and seasonal patterns in your business or industry
  • Make use of business reports or industry averages if you’re new in business
  • Do you have any new competitors?
  • What are the payment cycles of your customers?
  • Is there other income? (Government grants, owner investments, assets sales)

2. Estimate your Expenses

All businesses have fixed and variable expenses. Fixed expenses are costs associated with your business that don’t fluctuate. Variable expenses may change depending on sales or production volume. There may also be unexpected costs to consider.

  • Look at your estimated sales to determine stock and materials you’ll need
  • Check historical payments for ongoing bills and expenses
  • Consider any regular loan repayments and any one-off balloon payments
  • Include property expenses like rent, rates and taxes
  • Do you have any planned asset purchases for the year?
  • Don’t forget staff salaries and wages. Are there any ongoing payments to owners?

3. Put It All Together

Here is where you’ll put it all together to get your cash position each month.

Start with an opening cash balance (which is usually the balance in your operating account). You will then add any income and other revenue you have identified in your forecasting. From this you will subtract your fixed and variable expenses. The final number will be your end cash position for the month and your starting cash position for the following month.

This will show you at a glance how your cash flow is looking for the coming year. You’ll be able to see any shortfalls which will need to be addressed and managed, so your business can continue to operate during these periods. With the right template, you can also conduct stress tests on your cashflow to see how your business will cope if expenses increase or income decreases.

4. Review

Here is where you’ll put it all together to get your cash position each month.

Start with an opening cash balance (which is usually the balance in your operating account). You will then add any income and other revenue you have identified in your forecasting. From this you will subtract your fixed and variable expenses. The final number will be your end cash position for the month and your starting cash position for the following month.

This will show you at a glance how your cash flow is looking for the coming year. You’ll be able to see any shortfalls which will need to be addressed and managed, so your business can continue to operate during these periods. With the right template, you can also conduct stress tests on your cashflow to see how your business will cope if expenses increase or income decreases.

A Cash Flow Forecast Isn’t Just Numbers On A Spreadsheet

There’s hundreds of cash flow forecast guides for small business on the internet – but we want to help you see the value behind the numbers. Use our business expertise and industry knowledge to help you set up a cash flow forecast that provides real value for your business and puts you in the best position for growth.

Speak to a Modoras accountant about reviewing the cash flow in your business and see where you can leverage it for business growth.   

There’s enough challenges in business – let us help take the stress out of managing your cash flow. Learn more about improving profitability by listening to our Know Your Numbers – Managing Cashflow for Growth webinar

IMPORTANT INFORMATION: This blog has been prepared by Modoras Accounting (QLD) Pty. Ltd. ABN 81 601 145 215. The information and opinions contained in this blog is general information only and is not intended to represent specific personal advice (Accounting, taxation, financial, insurance or credit). No individuals’ personal circumstances have been taken into consideration for the preparation of this material. The information and opinions herein do not constitute any recommendation to purchase, sell or hold any particular financial product. Modoras Accounting (QLD) Pty. Ltd. recommends that no financial product or financial service be acquired or disposed of or financial strategy adopted without you first obtaining professional personal financial advice suitable and appropriate to your own personal needs, objectives, goals and circumstances. Information, forecasts and opinions contained in this blog can change without notice. Modoras Accounting (QLD) Pty. Ltd. does not guarantee the accuracy of the information at any particular time. Although care has been exercised in compiling the information contained within, Modoras Accounting (QLD) Pty. Ltd. does not warrant that the articles within are free from errors, inaccuracies or omissions. To the extent permissible by law, neither Modoras Accounting (QLD) Pty. Ltd. nor its employees, representatives or agents (including associated and affiliated companies) accept liability for loss or damages incurred as a result of a person acting in reliance of this publication. Liability limited by a scheme approved under Professional Standards Legislation.

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