Proper cash flow forecasting can allow small and medium businesses (SMBs) to make better decisions on future business expenditures, plan growth and better allocate resources. Here’s how to avoid making those common cash flow errors.
If a business is a living organism, then the cash flow is without a doubt its oxygen supply and the cash flow statement it’s heart rate monitor. For SMBs, it is critical to have working capital for essential purchasing, development and hiring, especially in the beginning stages where it’s needed the most. Creating a cash flow forecast and keeping your accounts in order not only serves as a reference point for measuring success, but also as a road map to ensure that the business remains viable. Losing track of small, seemingly insignificant expenditures might lead to bigger problems in future for any business. Here are five ways to remedy cash flow issues commonly faced by SMBs, and improve capital liquidity.
- Not accounting for payment delays
Another common mistake related to wrong projections is underestimating the time it takes for customers to pay you. Spend some time understanding the payment cycles in your industry and be as generous as possible in estimating the time in which you expect a payment to come through.
- Not taking project delays into account
There are several factors that can delay a campaign from ending as planned, and many companies fail to take into account delays in campaigns that could impact the following financial year’s numbers. For example, if a planned project is supposed to end in October, a conservative approach would be to expect the project to be delayed up till the following year so you can factor in additional time to account for overheads that still have to be paid in these circumstances.
- Human errors in calculations
Financial software may not be prioritized as a necessary expense in the early stages of doing business, however human errors remain one of the biggest causes of mistakes made in financial reporting today. Make sure you take the time to double-check the figures in your cash flow statements and forecasts. You can use financial management software such as QuickBooks to keep track of your transactions and outstanding payments and to store all of your essential financial information in one secure location.
- Failure to update forecasts regularly
Cash flow forecasting is an activity that will help your business at every stage of its growth cycle. Think ahead and don’t just forecast to a fixed point (such as the end of the year or end of the financial year) and stop there. Keep revisiting and revising your forecasts as you get closer to the end point, and keep your cash flow statements easily retrievable so that you are always clear where your company is at financially. Given that there will be a lot of uncertainty in the early days of your business, create a monthly or a quarterly forecast depending on your current position and needs.
- Forecasting based on historical results
Many businesses typically use historical results in forecasting expenditures for projects that are similar in nature. For example, if a business spends X amount on this year’s advertising campaign and plans to keep the campaign activities constant for the following year, it’s would assume that the advertising costs might be the same. It is better to factor in extra money into the budget to allow room for any unforeseeable costs. Maintaining your books and developing a well thought out cash flow forecast will give you the ability to plan ahead for cash requirements, avoid crippling financial surprises and create a strong foundation for a sustainable business.