Cash flow is a very common and important term for all businesses. It is just like blood circulation which travels throughout the body to maintain our activities. Precise estimations about the flow of cash in and out will help you draw a clearer picture of your business from the past few years to a near future of a few years ahead. You will be able to see your limitations, your top, and bottom, to be able to stay away from any internal financial crisis as well as have more efficient expansion plans.
Cash flow forecasting
Cash flow forecasting is a prediction of the amount of cash that goes in and out of your business in a specific future period of time such as a month or a year. What you normally need to do are:
– Estimating the opening balance for related accounts
– Estimating income
– Estimating expenses
– Estimating ending balance for related accounts
– Estimating the leftover
In the past, the most common way to do it is using worksheets manually with many human mistakes. However, with the development of technology, companies now are making use of online accounting software to automate part of the process and minimise human errors like miscalculating.
Forecasting profit
Before predicting your income, remember that business profit is not just cash generated from selling goods and services. It also involves other sources of cash from investment or interest revenue etc. You also have to predict with an open mind, not with your desire to get high earning ratios. To do it, you will need to conduct 3 different plans for 3 scenarios: pessimistic, optimistic and realistic. As a result, you will be able to react to any situation and show your investors that everything is under your control.
Profit from current and new businesses
For existing business activities, your historical data will be a valuable and trustworthy database. Your future income from realised from this data source will have no significant variation as you have gotten familiar with the majority of the hits and bumps such as return on investment or marketing factors.
For new business activities, you can still use historical data yet it will not be as helpful. Instead, make use of industry benchmark and advice from professional experts. You should:
– Discuss with an experienced accountant
– Use tools like Inland Revenue’s industry benchmark figures (http://www.ird.govt.nz/industry-benchmarks/bm-find-your-benchmark/), Stats New Zealand’s Industry Profile Tools (http://businesstoolbox.stats.govt.nz/IndustryProfilerBrowse.aspx) and Employee Cost Calculator (https://www.business.govt.nz/employeecostcalculator/)
– Hire experts or professional agencies to get advice about new market and industry
– Hire an experienced business coach
Do not just forecast final income of the period. A daily basis prediction will keep you on track at all time and getting a better control of every single change.
Forecasting expenses
Besides income, expenses are another main factor affecting directly to cash flow. You need to keep an eye on every expense from cash payments to incurred bills and invoices. Like what you have done with profit, do the same for outgoings. For current expenditure, use historical data as the base for any estimation. For new potential expenses, hire and discuss with experienced accountants or experts to add or subtract any change in expenses.
Cash flow forecast applications
The reason why cash flow forecast is very essential to any companies is its applications in a wide range of business aspects:
– Making investment decisions
– Making funding decisions
– Planning expansion
– Planning assets acquisition
– Planning for future cash amount
– Planning invoice time
– Avoiding financial crisis
– Dealing with tax obligations
– Creating benchmark
– Examining different scenarios
– Estimating payroll for new employees
Common mistakes
– Ignore cash flow forecast
– Only predict for optimistic situation
– Fail to make use of historical database
