The Golden Rules of Cash Flow Forecasting

The Golden Rules of Cash Flow Forecasting


Without it, we don’t buy inventory, or hire employees, or pay for marketing materials. Simply put, without cash, we don’t have a business.

As a business owner, mismanaging cash is one of the worst mistakes you can make. Fortunately, it’s also a mistake that you can avoid with some careful planning and forecasting.

In this article, we’ll discuss the golden rules of cash flow forecasting and give you some tips on how to forecast successfully.

Adjust Forecasts Regularly
No matter how well you plan, there will always be things that come up unexpectedly. Adjust forecasts regularly to allow for these changes and monitor how they’re affecting your business performance.

Start by creating a forecast for the coming month, then expand that forecast to encompass six months, and then 12 months. At the end of each month, review your cash flow forecast for accuracy and adjust for next month.

Carry that adjustment through to the end of the year. If you see issues starting to arise, catch them sooner by using this method of regular adjustment. Plus, this lets you actively look for ways to improve cash flow as the year progresses.

Properly Identify Income and Expenses
You might think you have your income and expenses nailed down, but there’s often something lurking out there that will come to bite you later. Start by taking a look into your past and making a list of all business expenses. What expenses have you had in the past that will carry forward to the future?

Clearly separate fixed costs and variable costs. Check-in with your vendors and other business relationships to make sure you have accurate due dates for those expenses. Make sure these expense payments are included at the right time on your cash flow projection.

Next, take a close look at your sales goals for the upcoming 12 months. Sales tend to fluctuate based on the economy and even on a seasonal basis. Have you included those fluctuations in your sales goals?

Project different scenarios based on how well you meet your sales goals throughout the upcoming year. Can your business still survive if you don’t meet your lofty goals? Creating several cash flow forecasts can help you answer this question.

Have “Just In Case” Financing In Place
Banks are much more likely to lend money to a company that already has money. If you wait until you’re completely out of cash, you might be too late to qualify for a traditional loan.

One option is to set up a line of credit with your bank for this. If you already have a line that you use regularly, ask to have the limit increased to cover those months when cash is tight. Use your cash flow forecasts to figure out how much money you might need in a crunch and base the amount of the line increase on that.

Don’t Get Caught Up with Revenues
Remember, revenues and cash flow are two different things. The point at which you recognize the revenue from a sale might be 30 or 60 days before you actually receive the cash for that sale.

During that wait time, you’ll still have bills to pay. If anything, it’s more important to keep a watch on your cash flow statement than your income statement.

Hire Help with Cash Flow Forecasting
Are you still concerned that you might not get your cash flow forecasting right? That’s when it’s time to hire some help.

At Cloud CFO, we provide bookkeeping and forecasting services to small businesses all over Australia. Let’s grab a coffee and discuss how we can help you! Contact us today.

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