Cash flow is the lifeblood of any business. The simple fact is that if not enough money is coming into your business to cover what’s going out, you won’t be able to generate a profit. Rather than trading blindly, there are many techniques you can utilise to ensure you’re always in the know about your business income. One such tool is a cash flow forecast, which a local accountant can help you with.
Acting as the barometer of the health of your business, a cash flow forecast will help you manage your money better. Here’s our guide on what is a cash flow forecast to tell you more.
Cash Flow Forecasting: An Overview
Before you head out for the day, you likely consult the weather forecast first to help you choose what to wear. The same mantra exists within the business too in the form of a cash flow forecast. Cash flow refers to the money coming in and out of your business, and the forecast takes a closer look at the amount of money this actually entails.
A cash flow forecast is created on a spreadsheet where it is then turned into a visible chart. It can be measured any increment of time, such as a year in advance or every 3 months. Some businesses may even want to track their cash flow daily too. The idea is to work out your net profit once all of your expenses have been deducted.
Why Do I Need A Cash Flow Forecast?
Cash flow forecasts are useful tools to help you plan ahead. Most businesses don’t have a consistent income every month of the year. Take florists for an example, who typically have their busiest month of the year in February due to Valentine’s Day. However, they need to be able to make their cash flow last across the entire year, which is why knowing their expected profits is key.
As a business, a cash flow forecast can also arm you with the insight to be able to counteract any periods of low turnover. Perhaps like most businesses your slowest month of the year is in January. If your cash flow forecast has shown this to be the case, then in the weeks before you can come up with special promotions, or increase your marketing efforts to shake up the downturn.
How Do I Get A Cash Flow Forecast?
It’s time to turn to the good old Excel spreadsheet. What you need to enter is a list of months, along with a column for the cash inflow and outflow for each month. Depending on your accounting knowledge, you can either keep this simple or break each expense down into greater detail. At the end, you’ll need to calculate what the total net profit is for each month.
What you are aiming to highlight is good months, bad months and areas for improvement. It might be perfectly normal for your business to have a huge drop in profits in a particular month, but for other businesses, this could be a cause for concern. The results are then usually presented to the senior management or shareholders to develop a strategy moving forward. Or if you’re self-employed, you can use it to weigh up this year’s performance versus previous years. It can also tell you whether your business is viable going forward too.
To Sum Up
Cash flow forecasting is something that all businesses should use to predict what’s ahead. By doing so, you’ll be a lot more prepared for any bumps in the road. Plus, it will ensure you don’t spend too much of your profits at once, leaving you with a much healthier bank balance overall.
You can either create your own cash flow forecast or ask an accountant to draw one up for you. The benefit of the latter is that they can create an actionable plan based on the results of your forecast, to make sure your business is on track.