A key step that is missed in many businesses is the forecasting and monitoring of your business’s cash flow. By utilising a cash flow forecast you’ll be able to plan ahead for the good times and the bad.
You may become aware of an upcoming period of business slow down and weakened cash flow, meaning you need to either “tighten the belt” on expenses or arrange external financing to cover your expenditure. Likewise, by knowing when you’ll have a period of strong cash flow, you can plan to expand.
Now you are probably thinking, “how do I create a cash flow forecast? I’m not an accountant.” Well glad you could join us – as below we will provide some tips to help you complete a cash flow forecast for your business.
Tip 1. Use accurate figures
Try to be as accurate as possible with your figures. It’s worth investing some time and careful thought into getting these figures right as this forecast is usually the focus for banks and anyone reviewing your business financials.
At the bottom of the forecast, make detailed notes on the assumptions you’ve made. These assumptions are the justification to others on why you are using those numbers. Writing down “+10% sales because it’s easy to calculate” probably won’t cut it.
Tip 2. Rely on solid research to estimate sales
Use solid market research as well as your sales history to calculate accurate sales projections. If you haven’t started your business yet, thoroughly research your target market to assess realistic future sales levels.
You should also consider peak seasonal periods – cash flow usually isn’t consistent all year round.
Tip 3. Estimate your business expenditure
Once you’ve estimated your sales for each month, you’ll be able to estimate your costs.
Again, you’ll need to explain in detail how you calculated these amounts. Make sure your own salary is realistic. Can you cover your personal living costs, or will you be draining too much out of your business too soon?
Tip 4: Watch your timing
Be aware of the expected timeframes your suppliers want to be paid by, and how long payments from your customers take to come in.
If your business is selling coffee you should receive a majority of payments from sales within the same day, or at worst two days later if the customer has paid by credit card. On the other hand, a commercial mechanical services business that services air conditioners will send out invoices to their clients with 14 day payment terms. Of that you might receive 60% of the funds within the 14 days, a further 30% received around the 30 day mark, and the remainder may take over 120 days to be paid, or not be paid at all.
The same applies to you paying your suppliers. Receive an invoice from your supplier for some air conditioning units with terms to pay in 30 days. If you do not pay on time and the supplier gets angry, you may be placed on “stop credit” and either have to pay on delivery or not be able to order at all.
Tip 5. Look for benchmarks
Find a profit benchmark for the industry you work in. It can be from somewhere as simple as the ATO’s small business benchmarks (located here), through to pay-for-view benchmarking from IbisWorld or the like.
If your business sits somewhere notably different from the average, anyone who looks at your cash flow forecast will want to know why.
Tip 6. Take a step back
You need to ensure the feasibility of the numbers you enter in to the cash flow forecast.
Can you really invoice $25,000 in a month? Does that mean you are working 18-hour days at the chargeout rate you are giving to your clients?
Tip 7. Check with your accountant
If you are going to present your cash flow forecast to someone external from your business (like a bank or new investor), it’s always a good idea to run your figures past your accountant first.
Don’t forget one-off items like licencing, insurance, accounting fees or your tax obligations. Many businesses struggle to find the cash to pay their income tax or GST obligations when they are due. Abbotts provide some of our clients with tax planning and forecasting so our clients can know what those tax obligations are likely to be.
If this is something you think we can help you and your business with too, then please give us a call