Cash Flow Forecasting

What Is Cash Flow Forecasting And Why Is It Important?

When it comes to small business accounting, some industry best practices can go straight over your head, especially if you are trying to do your accounting yourself. While experienced accountants can be useful, it can be hard to justify paying for them to do all of your bookkeeping for you. This can lead to a lot of stress on your behalf, as you try and navigate the difficult challenge of keeping your accounts during the year.

There are some things that you, as a small business owner, can do to improve your business efficiency and to manage your finances better. One of these things is cash flow forecasting, which involves creating a rough plan that shows how much income you are expecting over the following few months or years.

What Is Cash flow Forecasting?

Cash flow forecasting involves creating a detailed financial plan which does two things:

  • Calculates how much money you expect to flow into your business (income).
  • Estimates how much money is going to flow out of your business (expenses).

First, you need to make an accurate estimate of your daily business running costs. Include things like rent, electricity and other bills and wages. Multiply this by the number of days in your forecast period, and add any other major costs you can think of – include things like one-off maintenance, stock costs and accountants fees. The total of all these will be your total expenses.

Next, you need to make an estimate of your income over the same period. Start by recording your daily sales figures for a couple of days, and adjust these according to your future expectations. Multiply your expected daily sales by the number of days in your forecast period, and this figure represents your income.

Why Is Cash Flow Forecasting Useful?

Cash flow forecasting does a couple of things to benefit your business, including:

  • Identifying potential imbalances between your costs and income in the near future. If your costs are forecast to exceed your income, you need to reconsider your business model.
  • It will help you manage your finances effectively. It will allow you to plan for large bills which may pop up during the year, meaning you will always be able to pay them on time.
  • It will help you keep track of customer payments, and will help you follow up late payments.

How Can I Implement It In My Business Model?

If you think that cash flow forecasting could be useful for your business – and it probably could be – then you need to consider creating your own forecast. If you want to do a perfect forecast, then consider speaking to your accountants to make sure that you are doing things right. However, anyone with a little bit of financial knowledge and a bit of time on their hands can make their own cash flow forecast for their business.