Cash Flow Forecasting
Healthy cash flow forecasting is vital to any business.
Proper cash flow forecasting is vital for any business to succeed. A business can fail if it fails to plan for the future, and what cash it will need.
You will have probably heard this saying ‘Turnover is Vanity, Profit is Sanity, but cash is king’.
But why is this important?
Many businesses scream from the rooftops about their sales/turnover, but if they’re not making a profit, then what are they doing it for? And, even worse, if they’re making all those sales, but no one is actually paying them, then how will they pay their bills?
Cash in the bank is needed to pay the bills, buy supplies and pay yourself to live. Without cash in the bank, you’re not going to get very far!
So what does ‘Cash Flow’ mean?
Cash flow is the flow of cash in and out of your business.
You need more cash coming in, than going out each month if you want your business to survive and flourish. Yes, it’s a pretty simple statement, but it’s a very important one.
To do this, you will need to assess your cash flow each month to keep on top of it and ensure you have enough cash to pay for everything.
There are 3 key steps to ensure your business keeps a positive cash flow and flourishes with correct cash flow forecasting.
Step 1 – Essentials
Getting the basics in place and working for you should be the first thing you do.
You need to evaluate your processes from the ground up, and getting the right apps in place to help you with your cash flow should be your first port of call.
Consider;
- Sales CRM – are you tracking your enquiries?
- Credit control – could you automate this to save you time?
- Expense management – do you have unnecessary expenses?
- Getting paid – Is it easy for your customers to make payments to you? Can they pay by card etc?
Using Xero and app add on’s will improve the efficiency of your business through automation, meaning you have more time on your hands to generate more sales.
Step 2 – Planning
Planning for the future (i.e. next month, next 6 months, next year or even 5 years) is known as cash flow forecasting.
Cash flow forecasting (which shows projections of money in and money out) should be part of this, and is crucial for you to understand how your business works.
Once you’ve scoped out what your cash flow plan is, it will allow you to take the next step to further improve the financial health of your business and the ability to reach your goals, for yourself and the business.
Step 3 – Solutions
Once you’ve got your first cash flow forecast done, and you can see what potentially will happen in the future, you can build an action plan to solve any issues that you’ve spotted.
There are lots of businesses out there that can help you access extra funding for when you need it, either for short term cashflow or to help you achieve a longer term goal for your business.
Many of these connect beautifully with Xero, making it even easier to access funds when you need it.
Why is cash flow forecasting and planning important?
If you think about the decisions you have to make in a business every day, even the easy decisions have an impact on cash flow.
It can be a huge burden to business owners to ensure the business has enough cash to fulfil the needs of the business, and not knowing how much cash is needed makes decision making even harder.
Cash flow planning is an essential tool for business planning and can be completed in many ways, including on a spreadsheet, but spreadsheets need to be updated frequently which wastes time and often just gets ignored.
By utilising Xero and Float together, you have an up to date and real time overview of your business cash flow whenever you need it.
Quick short term tips for improving cash flow
- Agree the payment terms in advance.
- Take deposits upfront before starting any work
- For long term projects, take deposits and payments at key milestones – don’t invoice for the job at the end.
- Don’t assume that everyone will pay – set reminders or use automation tools to chase for you.
- Make your payment terms clear.
- Up-sell to your existing customers at every opportunity – including goods and/or services that compliment their existing agreement with you.
- Follow up after a sale to make sure they’re happy, and if there is anything else you can help them with.
- Discuss payment plans or extra time to pay with your suppliers.
Proper cash flow forecasting and planning are vital for any business to succeed, get the cash flow forecasting advice that you require from our team.
