michael-derin By

Michael Derin

Azure Group

Timing is everything and having the right cash flow forecast in place canwill show you if and when you need to borrow money, how much you would need, as well as when and how it can be repaid.

Learn the importance of having a cash flow forecast, and how to do a cash flow forecast in this post.

Turnover is vanity, profit is sanity, but cash is reality

Having adequate working capital at all times is really important and managing cash flow and budgeting carefully is critical. 

This involves keeping a vigilant eye on revenue, cost structure, the quality of your business plan and your capital structure to make sure your business remains cash flow positive at all times.

It’s often said that cash is king and the reality is, that the more cash sittingthat sits in your bank account, the more opportunity your business has. Companies looking only at their earnings and not managing cash flow can’t and won’t survive in today’s economy. The ones that do survive know how to build a cash flow forecast and how to analyse a cash flow forecast.

To have a good handle on their cash flow a business needs to understand how to produce a cash flow forecast. This helps them understand what their cash flow position will be over a long period of time in order to manage the inflows and outflows more effectively.

This is the reason businesses should maintain a cash flow management report. It assists in managing cash flow by showing a company’s inflows and outflows over a specified period. The report will normally begin with a starting balance and generates an ending balance after taking into account all cash receipts and paid expenses during the period. 

A cash flow management report is a powerful reporting tool, enabling businesses to closely monitor their cash flow.

The importance of managing cash flow for small businesses

Your cash flow forecast should be prepared monthly and extend out for the next three months as a minimum. Keep them conservative as the impact of a cash crisis can be severe.

If you want to know how to construct a cash flow forecast, here are some best practice tips to keep in mind:

1. Understand your cash flow or operating cycle

In particular, you should know the time lapse between the purchase and sale of goods and services and the ultimate collection of payment from customers. Aim to increase your operating efficiency and collect cash quicker by improving your operational processes, and reducing excess stock.

2. Increase your profits

Increasing sales are likely to improve profitability. Remember, increased sales may burden your short-term cash flow, particularly if you have an extended operating cycle period and sales margins are low.

By reviewing and modifying your business structures and costs you’re likely to improve profitability.

However, be wary of cutting costs that may have a negative impact on your business, such as investment in staff, marketing or technology.

3. Reduce collection period

Reviewing and improving your credit collection policy will significantly improve cash flow. Tips include:

  • screen your customers more carefully

  • offer incentives for earlier payment

  • provide progress payment terms

  • set realistic credit limits

 

  • follow up accounts quickly.

4. Extend payment and trading terms

 

Use trade credit where available and calculate benefits for making prompt payment to your creditors.

5. Business finance facilities

Implementing finance or overdraft facilities is, in the long run, likely to reduce the time and effort involved in managing cash flow. Typically, trying to obtain cash from your bank when you are in serious need is near impossible. On the other hand, putting facilities in place while business is performing well is likely to prove effective in the long run.

The Australian Taxation Office (ATO) charges more than 12% on outstanding tax obligations, well in excess of most business working capital facilities.

6. Most important of all – create a cashflow forecast

Preparing a cash flow plan will:

  • provide early warnings of potential cash shortages so corrective action can be taken quickly

  • identifies if additional funds will be needed

  • assist in preparing requests to financiers for additional funding by demonstrating that the business can meet repayments

  • identify potential surpluses than can be invested to generate additional income

  • help manage tax obligations.