2015 New Year Baubles

How to Make Cash Flow Forecasting Your New Year's Resolution

8 January 2015

With the new year come new year's resolutions! As you step forward with your business into 2015 it is essential your business has a cash flow forecast in place. This will map out the incoming and outgoing cash in your business on a monthly basis over time, and a map like that can transform your success!

Cash flow is essential to the success of any business, so think about your expectations for 2015 and this will enable you to make better-informed decisions. No business can plan for the future unless they understand how cash shortages will adversely affect your business or how surpluses can be used more effectively.

Step 1 - Start Planning

Cash flow forecasting should be done on a regular basis to ensure your business isn’t heading towards uncertainty. Fewer surprises means lower stress for your business in 2015, and cash flow forecasting is a great way to help businesses survive the months where workload will be highest or when you’ll be paying out the most.

Make sure you record your costs for the months when you expect to incur them. It's easy to show a monthly profit on paper but things can go wrong from lack of cash if you can’t pay your bills on time. There's a big difference between Profit and Cash Flow.

Cash flow forecasting will give you a realistic picture of whether your business will have the money to pay expenses.

Step 2 - Analyze your cash flow

Now you will need to focus on your cash position with a view to improving it. If cash is flowing out of your business faster than it's coming in (even just for a short period), you should look at these aspects of your cash flow:

To fix your cash flow problem your business needs more money coming in than is going out. Cash coming in may include an increase in sales or a collection of any outstanding accounts. A cash flow forecast will highlight any unnecessary outgoings and identify any early warning signals that your business may need a cash injection.

Remember: even profitable businesses get caught out by unexpected cash flow problems, but by forecasting and planning your expenditure well in advance you can give yourself a head start for a great financial year.

Remember the Golden Rules of Success

A basic cash flow forecast is better than no cash flow forecast at all, but if you want to plan for a profitable 2015 then you will need to follow these golden rules for cash flow success:

1. Be Realistic

Always make sure you are being realistic. You don’t want any surprises. Remember that the more accurate your cash flow forecast is, the more stable your company will be - and the less stressed you will be!

Be realistic with your sales forecasting and your costs, these costs may differ month by month, for example your utility bills may be higher in November than in July.

2. Watch both Income and Costs

Just because you send an invoice for £5,000 to a customer this does not mean you have £5,000 cash available to spend. You might not receive this payment for 30 to 60 days depending on your customers payment terms.

Payment terms on your costs will affect you too. If your suppliers are changing their payment terms to request cash sooner than you are expecting to pay it you could find yourself with a cash flow shortage.

A cash flow forecast is there to analyse the flow of your cash; where it is going and when it is going.

The golden rule here is not to count it if it isn’t in your account. Don’t play with money that you don’t have yet.

3. Look out for "Changes in the Weather"

You need to make sure you have forecasted for different situations and scenarios. Cash flow forecasting involves an element of estimation and you will never know for sure what your sales will be from month to month - whether or not your business is affected by the weather!

For example: If you sell jewellery, then you will usually see your sales rise in the run-up to Christmas from September to December. Knowing this you can estimate your projected sales, and thereafter create another scenario with slightly higher sales and another with slightly lower sales depending on the economy. Of course sales are not guaranteed, so forecasting should be treated as an estimate and not a prediction. Different scenarios will give you a fuller picture, and get you thinking about how you might handle those different situations. Chances are, at least some parts of these scenarios will be closer to the truth than your first forecast.

Cash flow forecasting is important to all businesses, but it is absolutely imperative for startups and micro-businesses. Don't get stuck before you start - try an inexpensive but powerful forecasting tool to give your company an accurate insight into its financial future.

Then give your business a new year make over and check out 14 ways to make your Startup a success in 2015!

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