The Three Steps to Create an Effective Cash Flow Forecast

Cash flow forecasting is a key management tool to start, operate, and expand your business. Every plan won’t be able to go ahead if you don’t have cash that will pay your bills or keep your operations going. Cash flow is essential for getting the most out of your operations with Australian businesses missing out on opportunities worth almost $6 billion annually, due to insufficient cash flow.

A cash flow forecast can help you prepare for your future. Although it’s impossible to predict 100% of your cash flow, a forecast gives the estimated amount of the money necessary to prepare your business for a certain period, like holding sufficient working capital while waiting for debtors to pay and meeting other future obligations.

Learn how to make your own cash flow forecast to be more confident in grabbing the opportunities to grow your business, and see how you can implement mitigation strategies for unexpected expenses. 

Why Create a Cash Flow Forecast?

Essentially, staying on top of your cash flow will help you observe whether or not you’re on track financially to fund critical projects and meet potential future outlays. For example, you can assume different trading scenarios to establish where your cash flow would end up under each. A bumper holiday season may allow you to fund the expansion you’ve been dreaming of, while a slow one may require you to access external funding. How should one prepare their cash flow forecast? Here are the three steps you that can help you get started:

Step 1: Prepare a List of Estimated Cash Inflows

This is the breakdown of the income you expect to receive from selling goods or services for a certain period. Prepare the anticipated sales by checking your company’s performance or sales history from the previous years. Decide the time that you want to plan. It can be a few months to a year.

“Take note of the internal and external factors, such as seasonal patterns that may have impacted or will impac your sales.”

Start with sales as your main cash inflow, but don’t forget non-sales income like tax refunds, grants, investments from shareholders, royalties, insurance claims, and more. Add the total amount of all these to get your total income. Look into the trends and take note of internal and external factors, such as seasonal patterns that may have impacted those sales (e.g. price increase and decrease or economic problems). These factors will likely impact the current period too.

Step 2: List Your Cash Outflows 

Check your expenses for a similar period in the past and calculate your fixed and variable costs. Fixed expenses can be daily or monthly expenses that don’t change, such as rent, employee salary, insurance payments, and more. Variable expenses often fluctuate, but you still need to include it in the calculation. This can include raw materials, packaging, buying new equipment, hiring new staff, and more. Add the total of these expenses to get your net outgoings. 

Step 3: Collate All the Data Together

Know your cash balance and decide the forecasting period. Once you have the data from the estimated cash inflows and outflows, bring it all together in a cash flow forecast. Here’s how to compute your cash flow position: Add cash inflows then deduct the cash outflows for the period of your choice. The final amount is the cash balance you will have left. Use this to evaluate your future financial position before making key business decisions. Searching the internet will provide you with numerous sources on the exact format of how a cash flow statement should look. 

A rising cash balance usually means your business is in a good position and can confidently expand to new opportunities, pay your debts, and purchase materials you need to fulfil your orders. Meanwhile, if you have a lower or negative cash balance at the end of the forecasting period, you may need to start looking for ways to improve your finances, such as alternative external funding

How to Improve Your Cash Flow

SMEs often face a problem with late payments from their debtors. This affects the cash flow since it impacts their business operations. One of the affordable solutions you can do whenever you face a cash flow problem is debtor finance. It’s a fast and affordable way to cover your needs while waiting for your debtors’ payment.

Debtor finance allows your business to access cash sooner from unpaid invoices. Invoice finance providers will pay you up to 90% of your verified outstanding invoice value upfront. When your customer pays and the funds are received by your invoice finance provider, they’ll remit the remaining 10% minus a small fee to compensate for early funding. Your business can use this cash instantly to pay your bills, secure new suppliers or invest in growth opportunities.OptiPay is here to help business owners like you to solve your cash flow challenges. Get the cash you need to keep your business going and invest in growth. Access tomorrow’s cash today with OptiPay.

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