Why you need cashflow forecasting

by | Jun 21, 2022 | Business Basics

Cashflow forecasting can be an invaluable tool as you continue to grow – but it’s all too often forgotten by business owners.

You might start by drawing up forecasts when you’re developing your business plan, estimating your future sales and expenses. But it’s also incredibly helpful for existing businesses who want to have a better understanding of their incomings and outgoings.

This will be incredibly helpful if you need to look for finance, make new investments or make any other key decisions about your business’s future.

If you want to make the most out of your business, you need to think about cashflow forecasting. Here’s why.

Being able to plan ahead

Planning ahead for the future of your business is essential if you expect to grow. You need to be able to identify any outgoing costs you will incur for the foreseeable future, as well as trends in your cash levels at different times of the year.

These costs include things like wages, maintenance for your premises, or business expenses.

You’ll also get an idea of the incoming payments you can expect over time, from your customers or from different finance sources.

The main aim of cashflow forecasting is to help you predict how those inflows and outflows will balance. It means you’ll have time to decide how you’ll use any surplus cash, and you’ll know ahead of time if you need to seek extra finance.

By forecasting your cash flow, you can set yourself business development goals. With a good idea of how your cash levels will stand in a certain month, you can start to consider upscaling your productivity and expanding.

If you have any outstanding debts, you should also forecast to plan your repayment periods, making sure you always have enough money to cover your essential costs.

Identify issues before it’s too late

Cashflow can be unpredictable if you’re not keeping track of it, but forecasting will help you foresee any problems your business may encounter.

For example, you know some months may be quieter than others. Usually some businesses see a drop-off in the new year, once everyone has spent all their money over Christmas and in the Boxing Day sales. With that in mind, you might choose to adjust resources like staffing over that time.

If you have a number of clients and some of them aren’t particularly prompt when it comes to paying for your services, you can use cashflow forecasting to identify these payment delays and create stricter credit controls to speed up your cashflow.

Finally, you can use a forecast to predict the effect any wider economic changes might have on your business, and create a contingency plan in response. Factor in interest rate changes or the chances of a recession.

How to start your forecasting

There are three main things you should do when drawing up a cashflow forecast.

The first step is to estimate your sales. Looking at your previous sales year to date will give you an insight into your performance over time, and a strong foundation to build from.

Secondly, go over your payment timings. As we mentioned, it’s important to know how punctual your clients’ payments might be. If a client pays two weeks later than the scheduled payment date, you can add this to the forecast and plan accordingly.

Finally, look at your costs and expenses. Some of your outgoings may be fixed costs, while others may be variable.

Your fixed costs will be areas you spend on which remain the same, regardless of sales. These include things like rent and salaried employees.

The variable costs will be income-related, such as supplies or perhaps even hourly-paid employees who may not have set hours.

If you need help, get in touch

As seasoned experts, the team at Mayflower can answer any queries you have about cashflow forecasting.

Contact us today.

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