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Cash is king

How To Forecast Cash Flow And Why It's Needed

The cash flow is how businesses survive. The incoming and outgoing 'flow' must be correct to make any money. On paper it can look good, but if monies owed aren't getting paid, if there isn't enough to cover bills, things can get serious quickly. Not having enough cash on hand to pay staff, suppliers, taxes, or owners leads to insolvency and it is illegal to trade in this manner. However, cash flow can be forecast to keep the coffers full. Strategies can be set in place to ensure a regular cash flow.

A forecast allows analysis of expected receipts and payments. This will assist in seeing if a business will be able to afford to run. Accurate forecasts can be handy especially if the income received is seasonal or subject to ups and downs in flow. By studying cash flow forecasts, previous market swings and asking similar business peers, successful benchmarks can be set in place to ease the business thought the low forecast periods. It is far better to arrange finance before the problem rather than after or during a cash flow crisis.

Potential financiers recognise and appreciate efforts to head off problems and will be more inclined to be right by your side when the lean times hit. Another valuable aspect of cash flow forecasts is to study the good business times and keep some of the money aside for the less active moments. Plus if there is a cash surplus that won't be needed in the short term, or in a hurry, look to invest it in a high interest, long-term saving account.

Reducing the Payment Cycle
Sales activity is the main cash flow source. No sales, no cash. But, not all sales are cash, some are invoiced and the payment allowed to be delayed on certain credit terms. Letting the time between service and payment go too long is not good. Here are some ways to avoid this:
  • Prompt invoicing
  • Accurate invoicing
  • A solid system for chasing payment.
Many businesses remove the risk of nonpayment all together by asking:
  • Are credit terms for customers really needed, and why?
  • Is advance payment or immediate payment an option?
  • Will a direct debit system with customers work? This can be a one off on a set date or regular intervals.
Remember cheques have to clear and if they don't it can reflect badly on your account. Once a track record is established a factoring or invoice discounting service can be set up. They pay right away and chase up unpaid monies themselves. Recent statistics from the Factors and Discounters Association show use of such services are on the rise. SME's made up 99% of those businesses.
Find out more about factoring and invoice discounting

Monitor carefully the amount of time between when customers pay and when suppliers want payment. If a credit term is established with suppliers, the one for customers needs to be shorter.

Consider using a credit card for your business for managing cash flow. Small purchases can be made with this and the bill can be paid in full at the end of the month.
Get a quote on a business credit card from Decision Finance
Other suppliers
American Express® Business Gold Charge Card
Barclaycard business card
Natwest business card

You could also run a monthly payment instead of a weekly one. But this isn't always popular with staff.

All of these are acceptable ways to manage cash flow. Paying suppliers late is neither acceptable or credible. You damage your relationships at best, and if your business gains a reputation for late payments, it will be difficult to find any suppliers to extend credit.

The Cash Flow Forecast
Typically a forecast is divided into:
  • Receipts--incoming monies
  • Outgoings - all payments out of the business. Can include wages, supplies, taxes, stock, repayments etc.
  • Balances - a monthly and cumulative balance. This should equal the cash in your bank account.
If registered for VAT it must be accounted for in the cash flow forecast. VAT on your sales will be received before the VAT bill is payable to the HMRC.

Cash flow forecasts are an attempt to predict future activity in an accurate manner. So you with this in mind, you will need:
  • Realistic budgets concerning sales activity. (Not done by taking previous year's sales figure and diving by 12 to get monthly sales amount)
  • An estimation of when revenue from sales will be in. (not the same month unless it is a cash sales only business)
  • An estimation of expenditure. How much and when will different items of expenditure be incurred. Look at all purchases and terms the purchases were made under. Also, include future costs incurred in advance, like rates. If cash flow figures from last year are available, they can help to jog the memory of possible forgotten items.
  • Loan repayment due date details.
  • The VAT output and input breakdown.
What if...scenarios
In determining a cash flow forecast, what-if scenarios are a handy tool. This can help show what the impact on cash flow will be if certain scenarios played out. What if sales fall 5% below forecast? What if costs increase by 10%? By showing you greatest areas of risk, it can also see there is no underestimation on the actual cash needed.

Keeping On Plan
Most importantly, try to make your forecast as accurate as possible. If providing goods or services on credit terms, for any length of time, use that in your forecast. Once experience has developed in the business, you will know how to make more accurate cash flow forecasts.

Each month review your actual cash flow and compare it to the forecast. You can then refresh the forecast as you go to stay on track and not get surprises you don't want.

Use your accountant for advice in areas where problems might be looming. Advice from a company who would lend you money for cash flow purposes is not the best idea.
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