How proper Cash Flow Forecasting can revolutionise your business planning.

cash flow forecasting

The new financial year is here. For SMEs, now is the time to be dusting off your records. You’ve got to plan and reset your course for the year ahead – and the most important thing to plan for is your forecasted cash flow. 

We know it’s a cliche, but cash flow forecasting really is king. You should always have at least 3 months of working capital stored away for a rainy day. Any less, and you’re open to being knocked out completely by the next big shock. Unfortunately, this is something a lot of small businesses learnt the hard way during the pandemic

So how do you make sure you stay in front of your cash flow and stay liquid? 

First, you need to realise that it’s not the sort of thing that sorts itself out, even if business appears to be booming. If you’re tracking your business finances by keeping an eye on your bank account, then you’re already in trouble. 

You need to put together a plan.

Failing to plan is planning to fail. 

The benefits of planning go beyond good business. Developing a clear understanding of your finances will directly affect your emotional wellbeing. It’s no secret that money causes stress, especially when there are payments due. 

Understanding what’s happening with your finances, and what might happen next, will go a long way to dispelling that gnawing sense of dread. By planning, you’re embracing a responsible business mindset, instead of leaving your success or failure up to chance.

Of course, most business owners will have done at least some financial planning. Because it’s required by law, they’ll have developed a profit and loss statement that covers what they earn and spend. Unfortunately, this is as far as most people go. 

It’s good practice to also put together a balance sheet that shows what you own versus what you owe. This will help you get a picture of where your business is at and how it’s been going.

The next step is to use this data to forecast where your cash flow is going. Most businesses will use the simple forecasting tools available on Xero. Others do it manually by comparing any regular or scheduled cash outflows against cash inflows, including their expected yearly sales. This is the basic method for developing a cash flow forecast.

If you’ve already done this, you might be thinking you don’t need this article – but I’d urge you to keep reading. This basic cash flow forecast is better than doing nothing, but it’s still rudimentary. 

It uses very simple data and makes broad assumptions. And it’s hard to develop a solid long-term plan with broad assumptions as your foundation.

So what if I told you there was a better way?

Trying to see the future? We can help you get a clearer picture.

At Rees Group, we use sophisticated in-house software to develop a clear visual picture of your business capital and how it’s forecast to continue over the next 12 months. 

Humanity might be yet to invent a crystal ball, but our software is a big step in the right direction.

And before you go rushing to Google, I’ll let you down easy. This is professional-level accounting software, not the sort of thing that you can subscribe to for a cheap monthly fee. Our program is cutting edge, and it goes well above the basic cash flow projection tools offered by Xero and Float. 

Our software deftly integrates all of the available data that your business generates. From there, it develops a comprehensive three-way overview of your business.

It integrates the balance sheet, the profit & loss statement and the cash flow to provide a clear and highly accurate forecast of what the next 12 months will look like for your cash flow. 

Having this clear visual guide allows you to conceptualise & analyse your business finances in a whole new way. You can go way beyond your projected cash outflow and inflow, deep-diving into different areas to see things you might have otherwise missed.

Perhaps you want to know how your staffing levels affect your cash flow, or how drastically your office expenses have changed post-Covid. Whatever you’re looking for, having this picture allows you to consider how your next decision might affect each different aspect of your business. And that’s important, because developing the projection is only half the work. 

It’s not about the numbers. It’s about what you do with them. 

I mentioned earlier that planning is the beginning of a responsible business mindset. This is because it allows you to see the micro consequences of each decision, and how it will affect the future of your business and your family. 

Understanding your cash position helps you take responsibility for your decisions and act with integrity. You’ve recognised that your future won’t fix itself and you’re committed to taking control of it.

That’s why developing these detailed 12-month projections isn’t just an exercise in staying organised and preparing for the quiet period. You need to think about what these hard numbers are going to mean for your long term goals. 

Think of it like this. You’ve now got a pretty clear idea of how the whole of next year is going to go. In fact, you can see that you’ll be making a lot more than you usually do over the next 12 months.  But what’s the best way to take advantage of that? How does it fit into your five-year plan?

These aren’t always easy questions to answer on your own. 

Fortunately, this is the sort of thing that our advisors specialise in. We can facilitate a half-day planning session, where we’ll work with you to analyse your forecast alongside your short and long-term goals.  Together, we can isolate what your best next move might be.

For instance, you may be building your business to pass on to your family. You might learn that now is the best chance you’ll ever have to set up a succession plan or a family trust, because you’ve got the spare cash to cover the admin costs and the rest of your business is currently sorted. 

Or maybe you’ll realise that now isn’t the time to make that big change you had pencilled in for next month. The projection might show that there’s trouble brewing in a different area of your business, so you need to put that fire out first before it spreads. 

No matter what your situation or your goals, you will always benefit from making the most comprehensive plan possible, based on the most accurate forecast you can get. 

A basic cash flow projection without long-term thinking simply won’t compare. 

The start of the financial year is the perfect time to take responsibility for your finances and make sure you’re prepared for the future. 

If you’d like us to develop a cash flow forecast for your business, or organise a half-day planning session to align this forecast with your goals, then reach out to one of our advisors today.

Disclaimer: This advice is general in nature and does not take into account your personal objectives, financial situation or needs. You should consider whether this advice is suitable for you and your personal circumstances before acting on it.

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