Are you paying the right attention to your business finances? Many of the business owners I work with admit they are not. Some are too busy, some don't feel confident dealing with the numbers, some are in denial, and others might feel everything's going great, so the detail doesn't matter.
It is a good habit to look regularly at your business finances, and I wanted to look at a simple but powerful tool that can help - the cash flow forecast.
What is a cash flow forecast?
Business cash flow is the balance between income and expenses over a specific period.
Imagine your home finances; you can list your monthly bills and payments and add up your total outgoings or expenses. You can also add up any salary, benefits or other income for the month. If you take your outgoings away from your income, you'll have either a positive figure (adding money to your bank balance each month) or a negative figure (heading toward your overdraft).
Cashflow forecasting for your business follows the same principle: planning ahead your expected outgoings and income and looking at the impact that will have over time on the money in your bank account and, ultimately, your pocket.
What are the benefits of having a cash flow forecast?
There are loads of benefits to putting a cash flow forecast together, including:
Budgeting - Mapping out your predicted annual income and expenses gives you a clear picture of what is coming in, what is going out, and when.
Proactive management - If you know of upcoming cash shortfalls or difficult periods, you can proactively manage your finances and reduce stress.
Focus on profit - Getting the numbers in black and white in front of you helps you focus on the bottom line - what will the bank balance look like at the end of the year?
Reducing costs - Mapping out your expenses helps you to see where you're spending money and perhaps identify ways to get your outgoings down.
Sales targets - Sitting down and working out how much you need to sell for your income to be right gives you the basis of your sales targets for the year.
Pricing - Experimenting with different cash flow scenarios can help you examine your pricing. What happens to my profit at the end of the year if I increase my prices by 10%?
How do I put together a simple 12-month cash flow forecast?
Your income: Make a list of all your expected income. What products/services will you sell? How many of each do you expect to sell? How much do you charge? If you're already running your business, you can use past sales levels and make predictions about what the next 12 months will look like.
Your expenses: Next, estimate all of your outgoings. This might include rent, utilities, salaries, marketing costs etc.
Opening balance: Identify what your opening bank balance will be at the start of the 12 months (how much is already in your bank?)
Calculate your closing cash balance: Subtract your expected cash outgoing from your expected cash income to determine your net cash flow for each period. Add this to your opening cash balance to determine your closing cash balance.
Use a simple template: There are loads of simple templates that make producing a cash flow forecast even easier. For example, I often use one from the British Business Bank, which can be downloaded on their website here.
Most importantly, when you have your cash flow forecast, use it to identify weak spots and model different scenarios to help you build a plan.
For example, what happens if you increase your prices by 10% or sell another five products? Can you hire a new staff member in the next three months and afford the new expense? Where could you reduce costs to increase profit?
Your cash flow forecast can become a living tool to help you explore different scenarios and can be used to set targets and track your progress.
Need to chat about your business finance habits?
If it would help to chat about any aspect of cash flow forecasting or get into better habits around your business finances, then why not book a free no, obligation chat using the link below?