Cash management is a core part of running a business. It’s not something you can afford to put on the backburner, but frankly, it can be a pain; distracting you from your real passion, leaving you working on your business, rather than in it.
82% of companies that go out of business do so because of poor cash flow visibility and management. (Source Business Insider.)
Whether you’ve got investment cash in the bank, or waiting on it to drop: you need to forecast the future, and see your business in new ways. Look at your cashflow (in and out) and make decisions based on how the year could unfold taking into account different scenarios over at next 12 months.
What’s the benefit of a cash flow forecast?
In essence the forecast is a plan on how much cash you’ll likely have (or not) in the months that lie ahead. Just like the weather forecast, there’s no guarantee everything will work out as planned: but it lets you prepare for what’s likely. Other benefits are:
- Faster decisions: Speed up the big decisions by having the numbers to hand.
- Clarity: You’ll be able to compare your actual income and expenses against your forecast to see whether your business is meeting your expectations.
- Budgeting: You’ll have more of a guide on what you can afford to spend on the business. So if you need new Macs for the team, can you afford it or do you need a loan?
- Growing your team: If you need more resource but not sure if you can afford to hire someone new, use your forecast to see the impact the costs would have and how your finances will be afterwards.
- Prepare: Spot any cash gaps and prepare for them ahead of time before any serious trouble hits. Running a worst case scenario based on what a problem would look like is really helpful as you’ll have a realistic idea of how long the business could stay afloat should that happen. It can act as an early warning system at the start of each month.
- Investor ready: Banks and Investors will want to know they are investing in a healthy business and need to see the cash flow forecast (on top of all the other documents) before handing over the money! A professional forecast will always help your case.
- Pay everyone on time: Make sure you can pay suppliers and staff on time by seeing if you’ll have enough cash in the bank. This is a big concern when a business starts to grow but the forecast can take away a lot of the headache and wondering.
Whether you’re focusing on growing your business or planning for exit you need a forecast alongside your business plan: they work together making your journey and decisions a lot quicker and easier.
What can a forecast help answer?
Business is full of change and you’re bound to have questions, here’s some examples of what a forecast can help answer:
- Can you expand in 2 months and start selling in another country?
- Can you afford new office or working space?
- Is now the time to hire new staff?
- Could you develop your product or service further, or create a new offering?
- Do you need to borrow some cash to do some of these things?
- Will you have cash in the bank in 3 months?
What details are key to the cash flow forecast?
Heard of a 3 way forecast? Well it’s built from some key elements: your estimated sales, expected payment dates and expected costs and measured against your bank balance. Typically you’ll take the first two points – your sales forecast and the forecast costs (losses) and combined you’ll get your profit and loss forecast. Then taking those forecasts you’ll add in your bank/cash balance and it’ll all come together to give you a useful view!
1. Sales and cash inflow
Set the timeframe for your forecast, if it’s 12 months you’ll need to think about (and estimate) how your sales are likely to look over that time. Will you have peaks around Black Friday, lows in January or is the year pretty steady? The starting point (if you have a sales history) is to look back at the previous year and look for these patterns.
If you’re new and don’t have that luxury – use your instincts, reference your marketing plan, speak to your advisors and look at competition to give you a gauge.
If you’ve any other source of cash coming in such as business loans, tax rebates, grants or any sale of assets you’ll need to add this into the forecast too.
2. Payment dates
When do you expect the sales to come through, and hit the bank? You’ll have set payment terms but unfortunately late payments aren’t uncommon – so be realistic and add a buffer. It’s typically 2 weeks late so build that into your forecast.
Xero and Paypal have a really interesting guide on late payments, and the impacts. View it here. There’s also a lot you can do to chase the payments automatically, ask us about our Chaser service.
3. Costs
All the exciting figures will now be in, but it’s critical you add all the outgoings to see the balance – some will be fixed and some variable, such as:
- Fixed: Staff salaries, memberships, software and rent are some examples: these will stay the same for a set period of time.
- Variable: Stock, packaging and raw materials can all vary and you may need different quantities each month: so the costs will go up and down! Compare against your expected sales.
You must include the dates and expected amounts for everything, and keep the forecast up to date. Remember to record your costs in the months that you’ll actually be paying them rather than the months in which you incur them.
4. Your cash balance
Bring the forecasts above together in one place and add in your opening cash balance and closing cash balance each month.
If your bank balance is consistently increasing then your business may be secure enough to make plans to expand, or at least go for the new opportunities you’re offered.
If it’s decreasing, it could be time to cut your expenses, change your pricing structure or look at finance options.
Learn to spot the gaps!
We’re running a webinar where we’ll delve into cash flow forecasting and share how to plan for cash gaps, or surplus before it happens: so you have clarity to manage your business for growth. Register here, or if the webinar date’s passed when you read this view the recording on our YouTube channel.
