As a small business owner, you know that keeping tabs on your financial health is key to success. While profits are important, understanding your cash flow is equally crucial. But what exactly is cash flow forecasting, and how can it benefit your business?

What is Cash Flow Forecasting

Before we dive into forecasting, let’s look at cash flow in general.

Cash flow is simply the money coming in and going out of your business. Cash coming into your business can encompass sales revenue, debt repayments, selling unnecessary assets, rebates and grants. Your outgoings can include things like payments to suppliers, wages, bills, maintenance and other business expenses. If your business has a positive cash flow, this means there is more money coming in than there is going out. While a negative cash flow means your business doesn’t  have enough funds to make ends meet.

A cash flow forecast is an estimate of a company’s future financial position based on how much money is coming in and out of the business. It goes beyond profit and loss, and looks ahead to determine how much money will be in your bank account at any given time, considering various factors such as taxes, non-profit items, and timing differences in invoicing. 

Benefits of Cash Flow Forecasting

Cash flow forecasting has several benefits, including:

  • Increased predictability around when money will be coming into the business.
  • The ability to proactively identify problems and plan for periods when you might be low on cash.
  • Greater confidence in paying your staff and suppliers on time.
  • Plan for different scenarios to help you make the right decisions at the right time.

Every business decision you make — from launching a new product to expanding your operations — impacts your cash flow. Cash flow projection serves as your compass, guiding strategic planning efforts by helping you assess the financial feasibility of your goals. With a clear understanding of your future cash position, you can prioritise initiatives, allocate resources wisely, and seize growth opportunities when the timing is right.

How to Approach Cash Flow Projections

  1. Start with a Budget: Begin by crafting a detailed budget that outlines your projected revenue streams, costs of goods sold, and overhead expenses. This serves as the foundation for your cash flow projections. Remember to revisit and adjust your budget regularly, especially in response to changes in market trends or economic conditions. Not sure where to start? Read our recent budgeting article HERE.
  2. Identify Future Capital Investments: If your budget indicates potential revenue growth, consider what capital investments may be necessary to support expansion. Whether it’s additional equipment, warehouse space, or vehicles, identify these needs and evaluate the best timing for procurement.
  3. Future Lending and Assumptions: Think ahead about how these capital investments will be financed. Will you rely on bank loans, private investments, or existing equity? Consider the terms and conditions of potential lending options, including interest rates and repayment schedules.
  4. Existing Capital and Finance Facilities: Factor in existing financial commitments, including debts and taxes. Make sure to take note of the specific finance terms on each of them.
  5. Owner Withdrawals and Dividends: If you’re taking regular withdrawals or dividends from the business, factor these into your cash flow projections. Understanding your personal financial needs helps ensure that your business remains financially stable.
  6. Payment Terms: Your cash flow forecast should also account for payment terms with customers and suppliers. Analyse historical trends and contractual agreements to accurately project cash inflows and outflows.
  7. Tax Considerations: Remember to factor in taxes, including GST and payroll taxes, into your cash flow forecast. Anticipate future tax liabilities and ensure that you have sufficient funds set aside to meet these obligations.
  8. Modelling and Decision-Making: Once you’ve gathered all necessary data, model different scenarios to assess the potential impact of various business decisions on your cash flow. Whether it’s investing in new equipment or adjusting payment terms, use your cash flow forecast to make informed strategic choices.

Seeking Professional Guidance

Remember — cash flow forecasting is not the same thing as your budget. It is built from your budget, but incorporates numerous variances and calculates cash in your business bank account at a given point in time. The building and modeling of cash flow forecasting is an accounting art, and can be tricky to navigate on your own. Seeking out guidance and advice from professionals can go a long way with your forecasting to ensure cash flow projections are accurate and reliable.

If your cash flow forecast needs a refresh, or if you want expert advice ahead of the new financial year, contact Hoffman Kelly for an obligation-free consultation. Let’s work together to secure the financial health of your business!