How to forecast cash flow in a balanced way

As most small businesses know, cash flow is vital to the very livelihood of the company.

The skill of generating cash, paying the workforce, bills and suppliers, whilst also having an eye on keeping some to invest in growth is what business is all about.

As accountants in Solihull, it is hugely frustrating to see sometimes good and profitable business having to cease trading as working capital has run out.

With this in mind, forecasting is the principle of looking as best as possible at the future operations of your business, to navigate those peaks and troughs

The skills to do this cannot be underestimated, and the more insights about your cash flow the better.

Of course, no one has a crystal ball to predict exactly what will happen at a given date in the future, but making a realistic assessment based on previous performance, and a rounded opinion on the current and upcoming business will put you in a good place.

After all, forecasting cash flow will show whether your business is meeting its targets and Key Performance Indicators (KPI’s). Also, comparing your business’ forecasted performance to what’s really happening can help identify where business owners should focus their energies.

This skill can also help to pinpoint opportunities that your business can take advantage of. It means that you will have the resources to take on additional staff, purchase/rent equipment that can make operations more efficient or to gain more business and therefore is highly valued by stable businesses

Also, it sets up the cash flow vulnerabilities or shortages, which allows you to prepare for cash obstacles on the road ahead.

 

3 crucial things to consider for a solid cash flow forecast

1) Predicted Sales

To start you need to be able to predict your likely sales figures for the period being forecasted and this can be achieved through looking at the historical sales of your business for the same period accounting for any issues that could impact the sales, such as seasonal changes.

It is wise to have a holistic look at this including not only the past, but you should also think of future contracted orders, promotional campaigns, and even market forces all having their impact.

 

2) Estimated Payment Period

To add to this, it is then vital to jot down the expected timing of receiving payments.

It would be wise to remember possible late payments in the period, as well as late payments from previous periods that may be added to the forecast.

 

3) Anticipated Costs

Last, but not least, after all, projected incomes have been calculated, you should consider calculating your costs for the period.

These costs are both fixed, and variable. For instance, fixed costs is generally straightforward being a constant price. This includes rents, salaries, or fixed subscriptions.

Of course, variable costs, are far more difficult to accurately predict. The constant fluctuation of costs such as stock, or materials, will need you to look at historical data, as well as predicted sales for the period.

In all, it’s a game, but one that all businesses have to negotiate and the more you do it the better you get.

Good luck with your forecasting and if you need any help with business advice, please contact us at AIT. We are happy to help.