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How forecasting can keep your cash flow in check

By Susan Edevane

2 min read

One of the biggest struggles for any business is an irregular cash flow. But it’s a particular problem for smaller businesses, which have less capacity to absorb the highs and lows.

Most companies are aware of obvious seasonal surges and slumps, such as the busy Christmas period followed by the January summer slowdown.

But there are other times throughout the year that can affect cash flow, such as end of financial year, as well as key financial dates and holiday seasons in overseas markets.

So how can your business be prepared for a cash-flow crisis? The best way is to create a cash-flow forecast for a specific period and regularly check and review your progress against it.

Creating your cash-flow forecast

Start by adding any cash inflows you expect to collect including revenues, interest earnings, grants and so on. Cash and credit sales need to be entered separately, since if your customers are slow to pay, the credit sales income might not arrive within the period.

Next, add all your cash outflows. These include everything from supplier payments and salaries to loan repayments and taxes, plus your rent and utilities. You also want to include possible irregular payments, such as repairs and maintenance. By taking a look at how much you’ve spent on things in previous periods, you can get an estimate of what these costs may be.

Finally, put in your account balance, and add the inflows minus the outflows to see where you’re likely to be at the end of a specific period. It’s also a good idea to repeat this for possible scenarios you may face, particularly if you have uncertainties hanging over you, such as a possible contract win or a major customer facing insolvency. You can also run the numbers to see how a potential disaster might affect you, such as if you suddenly had to replace all your hardware.

Reading your cash-flow forecast

Your cash-flow forecast will give you a sense of where you will be each month, so you can see where the gaps are. If you need to pay salaries or bills and it looks like you’ll face a cash crunch, prepare contingency measures in advance, such as a bank loan or factoring. This is a kind of debtor finance where you raise money based on your accounts receivable (invoices).

Your forecast can also give you a lot of insight into your own business when you compare actual figures to what you originally forecast. If there are big discrepancies between the numbers, you need to dig deeper. What happened to throw off your estimates? Did your costs spiral? Did you suffer bad debts? Or, conversely, did you win a lot more business than anticipated?

Based on how things went, you can adjust forecasts moving forward so they are more accurate next time. You can also adjust your strategy to cope with seasonal fluctuations and avoid a shortfall in future. Being prepared for the worst can keep your finances in check and safeguard your business.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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