A solid cashflow forecast is essential to helping you understand and control the movement of cash in and out of your business. As well as helping you pay your bills on time and avoid nasty surprises, you’ll have an immediate understanding of how much to borrow and when. This ability to predict the natural peaks and troughs of your business will set you in good stead for the future.

How to Do a Cashflow Forecast

A cashflow forecast is a simple matter of income and expenditure. Usually done quarterly or annually, you’ll need accurate information regarding your future expenses and realistic estimates of your future sales. Past business performance is the most reliable indicator of the future, so look at your previous quarterly or annual receipts and payments. Subtract your payments from your receipts, note your opening and closing bank balance, and place both your forecast and actual figures in two columns. We would be happy to discuss this with you and we have a team of accountants that help you produce an accurate forecast although accounting software will suffice for small to medium-sized businesses.

Review, Refine, and Re-estimate

Even if you think you’ve been realistic in your estimates, market trends, legislation, and interest and tax rate changes can have a marked effect on your cashflow forecast. Updating your forecast in line with these changes will help you plan and adapt. From here, you can look at how areas of your business are performing and plan for necessary changes.

Combine Cashflow Forecasts with Good Accounting Practises

The beauty of accurate, up-to-date accounts and regular cashflow forecast reviews is how they allow you to keep things in order. You’ll soon gain an understanding of which customers you can afford to extend credit to, how to alter or arrange bill payment schedules, and the importance of prompt invoicing and banking,

Paying and Getting Paid

One area your cashflow forecast will highlight is the gap between paying your suppliers and being paid by your customers. This is likely to prompt you to seek better deals from suppliers and work with those who offer incentives for prompt payment. After all, prompt payment often results in suppliers who are more willing to negotiate favourably. By the same token, look at offering prompt payment incentives to your customers and don’t be afraid to implement penalty interest and debt collection procedures where necessary.

Analyse Asset Management PerformanceFinance

Efficient management of your resources will have an immediate impact on your cashflow, as will become apparent in your forecast. If you’re not getting the best out of your resources consider stripping them back until you’re only left with those that are business-critical. Look at whether leasing assets is a better option than purchasing, and analyse whether you’re ordering too much stock.

Improve Cashflow Through Your Financing Practices

A combination of debt factoring and invoice discounting can improve your cashflow immediately. Another thing to look at is how you borrow money. For short-term requirements, overdrafts are a favourable option, while loans are best for long-term borrowing. If you’re VAT registered, only buy major items at the end of your VAT period and don’t forget to offset against your sales.

Streamline Your Invoicing Systems

How you accept payment, the methods by which you invoice, and how regularly you invoice will all have an impact on your cashflow. Using accounting software can help streamline this process, as well as deciding to accept online bank transfers and credit card payments. Look at your payment terms and consider whether you should be stricter on those who pay late and incentivise those are prompt.

Assess Your Cash Needs

As well as looking at cashflow, compare and analyse your assets and liabilities. Talk to your accountant about employing financial tests such as gearing, working capital, or quick ratio tests. Note that for these tests to be accurate you’ll need correct up-to-date figures.

Identify Potential Cashflow Problems

Some things can’t be helped such as customers going out of business, VAT or interest rate fluctuations, changes to your competitive environment, and new legislation. If the worst happens and you have encounter cashflow problem, be honest with your accountant and look at options realistically.

Arranging Finance

Use your cashflow forecast when shopping around for finance. Avoid loan sharks and talk to a number of reputable lenders. You’d be surprised at how they’ll help.

For information about the business services that Pearson Buchholz offer, get in touch by calling 01865 865800. You can also contact us online.