First, forecast your expected sales. If your business is young, you may need to look at industry averages and competitors’ figures. The Canada Census Program can also help you get information about customers that fit your target market to help you make educated estimates. Once you establish your business, you can generally rely on past figures to project future sales, but keep in mind industry trends and competitor activities that can impact sales year over year.
Payment Terms and Cash Flow Delays
While you can record a sale when you make it, it’s not always appropriate to count that as incoming cash in the same period. Consider any customers who use instalment plans or have other payment terms that can cause delays. You should also account for other parts of the billing process that can slow things down. Some are predictable, such as the time it takes your billing department to invoice the customer, but others are less so, such as customers who are late on their payments. Calculating your historic average days sales outstanding, or the average time it takes you to get paid, can help you make more realistic estimates about when to expect incoming cash from sales.
Fixed expenses are easier to estimate, as they are relatively unchanging. These expenses can include rents and mortgages, fixed salaries, and internet and phone bills. Make sure you don’t overlook any variable components to these expenses, though. Your internet provider may charge a flat monthly rate, but data usage plans may cost you more. Similarly, under Canadian laws, even salaried employees may qualify for overtime, and this counts as a variable expense. Don’t include any fixed expenses that do not involve any outlays of cash, such as depreciation or amortization.
Variable expenses are a little trickier to predict, as they can change based on the volume of sales and the amount of labour and inventory you need to meet that volume. Labour costs, such as commissions and wages, and costs of goods sold, including parts, shipping, and utilities, can vary based on your sales. Remember to account for income taxes, too. Make sure you stay on top of the Canadian Revenue Agency’s latest filing rules for businesses and include your estimated taxes in your variable costs.
Calculating Cash Flow
Once you account for all your various revenues and expenses, calculating the net cash flow is a simple matter of subtracting cash outflows from inflows. Getting a handle on all the various components that feed into this formula can be tricky, but there are many apps and templates you can use to streamline the process, including QuickBook’s cash flow forecast feature, so you don’t have to be an accounting expert to get a fix on your incoming and outgoing cash. Just input or upload your entries for each account, and let the software do the heavy lifting.
Whatever resources you use, forecasting cash flow gives you the tools you need for better business planning, so you can make smart investments while still having cash on hand when you need it.