How to build a cash flow forecast

Green plants growing out of a stacks of coins.

No doubt you’ve heard the sobering news that the majority of small businesses in Australia fail within five years of opening. Don’t be disheartened – there’s a secret weapon that many owners forget to use: cash flow forecasting. 

The ability to accurately predict how much money is flowing into your business as well as the amount of debt you will have to pay out, can mean the difference between success and failure. Understanding your cash flow can help you navigate difficult sales periods, ride out seasonal dips, embrace opportunities and plan ahead. And yet, so many business owners fail to do even the bare minimum in managing their finances.

To help you stay on top of your ingoings and outgoings, here are four simple steps you can take today to create the ultimate cash flow forecast.

  1. Estimate your sales

Whether you do it weekly or monthly, the very first step for your cash flow forecast is to estimate how much cash you will be bringing into the business. Take a look back at your sales history and see if those figures will be similar over the short term. If you typically experience seasonal highs and lows, these should also be factored into your sales expectations.

Other influences that may impact your prediction will be things like marketing (have you invested more money into promoting your business or products recently?) and competition (is there a new player in your sector who could potentially take customers or clients away from you?). As with any good forecast, remember to build in a margin of error, as it’s very rare that your estimate will be exact.

  1. Solidify your payment terms

Anyone who has been in business long enough knows that just because you make a sale, that doesn’t mean you’ll receive the money immediately. In many instances, you’ll be waiting 30 or more days for clients to pay your invoice. These payment terms must be built into your cash flow forecast to provide an accurate prediction.

If your forecast shows you will be struggling with ingoings over the coming months, it might be time to speak to some of your regular clients to see if you can update your terms. Offering an incentive – such as 5% off for early payment – could help you get over any financial bumps.

  1. Predict your outgoings

In addition to paying suppliers, you will also need to factor in how much money your company will likely spend in the near term. Some of these costs will be fixed – such as rent and staff salaries – while others will be variable.

It may not be perfect, but try your best to predict how those variable costs will impact your bottom line. A good way to do this is by looking back at your expenses over the previous months and years. And don’t forget about any one-off yearly fees. Things like annual subscriptions or registration fees for company cars can make a real dent in your cash flow if you forget to include them in your forecast.

  1. Collate all the numbers

Once you have all your ingoings and outgoings written down, it’s time to bring everything together. An easy way to do this is to start with a figure – the current amount in your business bank account is perfect – then add to that number your predicted profits, and minus your expenses.

Here’s an example. You have a starting balance of $15,000 + $12,500 profits for the coming month – $11,000 in expenses = $16,500 total.

The number you are left with is your cash flow forecast, and while there will no doubt be some room for error, it will give you an idea of whether you can expect an overall profit or your expenses will outweigh any expected profits.

“Every business owner that we work with has all the very best intentions of staying on top of their finances, but it’s easier said than done,” says Sarah Cook, Managing Director of Elev8 Business Services. “When you’re in charge of it all, you get pulled into everything, so suddenly, things like finances become a lesser priority in your day. It’s why we encourage our clients to set aside some time every quarter to look at their cash flow, and outside of that, keep in regular contact with their bookkeeper. We’re here to help!” 

Ready to take control of your finances? Contact Elev8 Business Services or call 1300 588 527 to find out how our bookkeeping packages can help your business stay cash flow positive.