During the Christmas and New Year shutdown periods, sales generally slow and your business may not have as much cash coming in as it would normally. This may impact your cash outflow – how much you can pay out – during that period. Creating an end-of-year cash flow forecast now will help you prepare for this period. Cash flow forecasts identify potential problems, including likely cash shortfalls, and help you to avoid them. Forecasts also ensure you have enough money to pay suppliers and employees during quieter periods.
What is a cash flow forecast?
A cash flow forecast helps your business survive. It provides exact information about what cash is coming in and going out and when those transfers occur, ensuring that your business has enough cash to continue operating. The forecast itself is a financial plan, or budget, for the business. It is a short-term estimate of what cash inflow (sales) and cash outflows (expenses, staff costs, BAS) will be over a 12-24 week period. Forecasts give business owners an understanding of their cash commitments and how their businesses need to perform in order to meet those requirements.
How to prepare a cash flow forecast
The easiest way to prepare a cash flow forecast is to break it into the following steps, then input the information into an accounting or spreadsheet program.
Step 1: Review sales from prior periods to understand what your cash inflow will be over that period.
Step 2: Check which debtors those sales were generated from to understand the timeframe in which you will be paid. Remember to also account for cash sales.
Step 3: Review prior bank statements to understand cash outflow over prior periods.
Step 4: Include all fixed expenses that you know will occur over the period, such as salaries, rent, loan repayments, finance repayments, etc.
Step 5: Include all your ATO and payroll compliance amounts such as BAS, PAYG, superannuation and payroll tax.
This information will give you a full understanding of what you need to achieve over the forecast period, which you can then tweak to ensure sufficient funds are available.
It pays to be precise
It is crucial to be as accurate as possible when estimating the different types of cash inflow and cash outflow that you expect during the forecast period. If your forecasts are inaccurate, the money from your business won’t be used optimally and you may not be able to pay down debt or fund growth, for example. An accurate forecast will also give you time to make changes if you are on a course for trouble. In order to best predict how much money will come into the business, review your past sales for the period and how your debtors pay you – remember some debtors pay 15 days after receiving an invoice, while others may pay after 60 days. To best predict cash outflow, list what your business will need to pay out during the period, including debts, wages, stock, operating costs and BAS.
Five tips for accurate cash flow forecasting
1. Be realistic. It’s the golden rule of effective forecasting. Make sure your estimates and assumptions are realistic and include every item.
2. Estimate sales from previous sales history. This will give you a good starting point for likely purchases for the next planning period.
3. Factor in fixed and variable costs. Fixed costs like rent, wages and loan repayments are easier to predict as they tend to remain the same, while variable costs like advertising, materials and professional fees can be trickier. Reviewing past periods will be useful, but factor in a buffer for possible price increases.
4. Plan for seasonality. If seasonality is an issue for your business, be sure factor this into your forecast. Ensure you put aside reserves for the fixed costs during the quieter months.
5. Revisit and update. Many business owners prepare a basic, yearly forecast and then forget about it. For the most effective results, forecasts need to be revisited and updated on a continuous basis.
In terms of creditor payments, if you find that your sales will be slower at the end of the year and you won’t have as much cash inflow, make smaller, weekly payments rather than large monthly payments to ensure a consistent cash outflow. Talking to creditors early can help in terms of payments, as many will be accommodating. Most importantly, you don’t need to do this yourself – when making realistic cash flow projections, get help from a professional. A good VCFO or accountant will prepare your forecast and give you expert advice on how to best proceed.
Cloud CFO provides customised CFO and accounting services for small to medium businesses, helping them to understand their financial position, manage overall business performance and grow their business. Please email us at info@cloudcfo.com.au or post your questions in the comments.