It’s not uncommon for small businesses to experience cash flow problems. Some owners are unable to match the timing of their cash inflows and outflows, resulting in shortages of funds.
The trick is to try to think ahead and figure out when these problems are most likely to occur, this will allow your to avoid postponing essential purchases or filing for immediate loans. This is where cash flow forecasts come in.
The cash flow forecast is a planning tool which can help you manage your business’s financial health by doing the following:
1. Predicting your financial position
Cash flow forecasts are used to predict your business’s future financial position for months or even years come. This allows you to see how much money you can expect to flow in and out of your business based on a history of sales and expenses.
Think about whether you’ve identified patterns in your cash flow statements in the past. Have you had to increase inventory to bulk up for holidays like Christmas or Valentine’s Day? Did customers prefer to delay payment for services until they reached a particular month? You can use this kind of business know-how to make future forecasts and then plan and take actions to avoid your business experiencing cash flow problems.
2. Identifying gaps in your budget
There may be periods in your business cycle where money doesn’t come in fast enough for you to cover immediate expenses. In this case, preparing your cash flow forecast will give you more options as to how you plan to overcome this issue. You can plan for a loan, credit card or even delay making payments or purchasing non-essential items to free up some additional cash.
This can also allow you to adjust your payment schedules to make cash inflows and outflows harmonise better. For example, you can coordinate with customers regarding how much credit you can extend to them while appealing to your own suppliers for a more convenient invoice schedule.
3. Making business plans more comprehensive
Aside from giving you an estimate of your cash position and alerting you to potential problems, your cash flow forecasts can also be used in conjunction with your sales forecast and business plan.
If you’re aiming for higher income next quarter, your cash flow forecast can tell you how much cash your business needs in order to get there. It also helps in ensuring your business doesn’t go bankrupt until you get returns on specific investments.
4. Measuring your business’ financial health
Lastly, you can measure how close you were to your cashflow forecast by comparing your actual with your planned forecast at the end of each quarter.
If your cash position is better or worse than what was forecasted, you can identify why and use this to help your planning in the future. If your actuals are lower than planned do you need to make changes in your billing system, or maybe you have a customer service or quality control issue affecting sales? Have outside factors affected your normal projections for expense? What can you do to minimise these effects in the future?
Asking the right questions about your cash flow and performance ultimately empowers you to make the right decisions, improve your business and most importantly minimise the chance of cash flow issues sending you out of business.
To learn more about business and cash flow management, you can contact Omnis Group at 9380-3555 or 1800 99 66 90. Our friendly team of professional business advisers and accountants are more than willing to help.
You can also use our Free and Easy Action Plan: “How to Forecast Cash Flow” to project the cash going in and out of your business, and the cash surplus (or deficit) that it can generate.