What is the number one factor which can sink even the most successful business? Cash flow. Maintaining cash flow is absolutely essential for businesses to operate successfully and sustainably. Without sufficient cash flow, you won’t be able to pay your employees or suppliers, cover your rent or purchase product, which can quickly cause the business to spiral out of control.
So, how can you ensure that you will have enough cash coming in to cover your costs? The only way to gain this visibility is by forecasting cash flow.
Why forecast cash flow?
Profit isn’t the same as cash. If you only look at your gross and net profit, you’re only reviewing a small part of the story. Even if your business is profitable and is bringing in enough revenue overall to cover your costs, that doesn’t mean that you will always have enough cash to operate.
Some weeks or months will see more cash going out than others. If you don’t have enough cash now to pay suppliers or purchase product, then any anticipated profits will be in jeopardy. By forecasting cash flow you can ensure your business has enough cash at all times to operate, avoid overspending and ensure you don’t run out of cash reserves.
What is a cash flow forecast?
A cash flow forecast will map out what cash you expect to bring in each week, fortnight or month as well as your anticipated cash going out over the same period. Your forecast will help you assess whether you’ll have enough cash coming in and cash reserves to cover the cash going out.
It’s essential that your forecast incorporates both locked in cash coming in, as well as anticipated cash going out. Your forecast should be updated regularly to reflect any changes and replace estimated figures with actual figures once known.
What should be included in a cash flow forecast?
First things first, you will need to select the relevant time period to assess – for example, weekly, fortnightly or monthly. Monthly is commonly used, but depending on how your business operates a shorter time period may be required.
Next you will need to track your opening cash balance at the beginning of the period. This refers to the cash reserves you have available and ready to draw on immediately.
From there you will want to look at your estimated and actual cash inflows. This will include accounts receivable as well as other sources of revenue such as proceeds from the sale of assets, tax rebates or finance.
Next you will want to look at your estimated and actual cash outflows. This will include cost of goods, expenses and overheads, bank fees and loan repayments.
By subtracting the cash going out of the business from the cash coming into the business over the relevant time period you will be able to calculate the net variable cash flow. If this number is positive it means you’re bringing in enough cash to cover the cash going out over that period while adding to your cash reserves. If it’s negative it means you’ll need to tap your cash reserves in that period.
Finally you’ll want to track your closing cash balance at the end of the period. This will reflect how much cash you have left over in your cash reserves once cash goes out. If your net variable cash flow is consistently negative then this will see your cash balance go down. The important thing is to avoid your cash balance dropping too significantly.
It’s important that your cash flow forecast is very detailed to maximise accuracy. If your forecast is vague or not updated regularly it is essentially rendered useless and won’t give you the data you need. It also makes sense to build in uncertainty such as clients not paying on time or any unexpected big purchases that can’t be avoided.
Your accountant is best placed to create a detailed cash flow forecast for you which covers all sources of cash in and cash out, draws on the data from your accounting system and closely reflects how your business operates including your chart of accounts.
What can you learn from a cash flow forecast?
By gaining transparency on when you may experience a cash flow bottleneck down the track, you can intervene early and take action to protect your cash flow. This may include cutting costs, increasing revenue or seeking finance to ensure you aren’t wiping out your cash balance and that you have enough cash to operate.
Essentially a sound cash flow forecast will arm you with the right data to make important business decisions to keep your business operating sustainably and successfully.
Looking to forecast your cash flow? Keeping Company can help. Contact us today to create a detailed cash flow forecast to strengthen your business’ financial position.
At Keeping Company, we’re not just accountants, we’re business people too. With our counsel, your business can reach its full potential.
We have a team of experts; Cloud Accountants, Business Advisors, Finance Specialists working together and ready to help, contact us today.
For all media enquires please contact Tracy Miller, CMO, Keeping Company 0414 898 452.
The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.