Things To Consider When Doing A Cash Flow Forecast

As a business owner you wear many hats; expert in your industry, marketing manager, operations manager, finance controller and the list goes on. When you are not an expert in that field, in can be hard trying to do everything yourself and even harder to do it exceptionally well.

When it comes to your cashflow forecast, your bookkeeper or Accountant is an excellent person to work with to help you plan where you anticipate your businesses finances being in the next 6 – 12 months. However, like many of us, they are not mind readers so there are a few things we need to be aware of within our business to help put it together. We’ve put together a few things to consider and be aware of when working through your cash flow forecast.

First things first, why are cash flow forecasts important?

In business, ‘cash is king’. Cash flow is the life-line for all businesses and can be the reason many businesses fail. Cash flow forecasts can help identify any potential shortfalls in cash balances well in advance. This will help you put a plan in place early, so you are prepared for when it happens. Cash flow forecasts can also help businesses make sure they can pay suppliers and employees and spot problems with customers payments.

Be aware your income

It is important to be aware and realistic about the revenue your business is generating. Getting this part of the cash flow right is imperative to ensuring you are not left with large cash deficits, putting pressure additional pressure on you. In our business, we are always really conservative on what we’ll earn and work on a ‘worst case scenario’ basis. This ensures we are prepared and anything extra is a massive win! Be realistic too, it is always great to push yourself with your own targets and goals, but make sure the figures you are using in your cash flow forecast are achievable.

What are your expenses/outgoings?

It is important to know what you need to spend to make money. If you need to purchase materials or supplies for your business, it is important you know the quantity you need, how frequently you’ll order, the cost and when they need to be paid. Build this into your cash flow, so if you make large orders, you are prepared for the initial outlay. Putting this forecast together will also help you see how quickly and effectively you are recouping the costs and making money! Be aware of all the basic expenses needed to run your business; phone, internet, stationary, IT expenses etc. You should know what your overheads are every month and what you need to earn to keep moving forwards. Also ensure you note the expenses that are paid quarterly, six monthly or annually. We know we have membership and insurance renewals in July and October, so know to keep more money in our account during this time.

Include Tax Obligations

Speak with your Accountant and start tax planning!! Make sure you are including any tax, GST or super obligations into your forecast. If you have employees, make sure you know the tax and super you need to pay. Have someone assist you with your GST so you can tentatively input what this will cost you quarterly. There is nothing worse than having a tax bill arrive and worrying about how you will make the payment. A friendly word of warning, Banks do not like seeing outstanding tax liabilities or anyone using the tax man as a bank. Having your tax paid on time and up to date, helps to show your management skills within your business.

Include anything you will pay yourself

Unfortunately, when we decide to start a business, mortgages, rent and bills still demand to be paid! If you can, use your cash flow to work out if your business can afford to pay you. Keeping your business and personal banking separate will make it easier for you, and your accountant will love you for it. So, where possible, include payments to yourself so you know when you can take a wage or whatever your Accountant recommends.

Make sure you look and update it!

All the hard work you put into preparing a cash flow forecast is useless unless you use it. Keep reviewing it every 3 – 6 months and update it monthly so you know where you are. It is such a useful tool for your business and will help you a lot. In our business, we review our cash flow monthly and forecast 3 – 6 months in advance based on what we are working on. We take time out to sit and discuss it too. This helps us focus and gives you even more motivation to keep working hard. We can also plan all the next exciting steps we want to take in our business.

It is great to have a cash flow forecast with any business plan. If your goal is to update your website, but your bank balance says you can’t afford it, you are not going to be able to achieve it. They work hand in hand and help you plan.

We hope this helps you start to think about cash flow forecasting. If you need any help or want to know where to start, please get in touch or speak to your Accountant.

Credit Representative 490860 is authorised under Australian Credit Licence 389328 www.finarc.com.au

This article provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. It does not constitute legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances.