Four easy steps to cashflow forecasting

You can’t run a business without it, but many SMEs put cashflow forecasting in the too hard basket and just hope there is enough cash in the account each month. It’s a risky way to run a business but the good news is you don’t need to pay someone else to do a forecast for you, and it is not as complicated as you might think.

Cashflow forecasting will determine whether the business is heading in the right direction, estimating the amount of revenue and income that will be achieved in the future.

Not only will it tell you if you’ll have enough funding to run the business or expand it, it will also alert you when more funds are going out of the business than coming in.

It should be standard practice for every business regardless of size because it helps you make more informed decisions for the business, such as whether to invest in new equipment. 

You can also see what might happen if you go ahead with an idea for the business. For example, if you’re thinking about putting on more staff, or opening another shop front, you can add those costs to your forecast to see what the impact will be before you decide whether or not to go ahead.

Here we look at four simple steps you can take to stay on top and keep your business in the black by forecasting your cash flow.

Step 1. Forecast your income or sales

To start with, decide on the period of time you want to forecast for. Monthly forecasting suits most businesses and lets you see what’s ahead quickly. 

Look at last year’s figures to see if you can spot any trends to see whether sales increased, decreased or stayed the same and adjust this year’s forecast accordingly.  

Don’t forget to estimate when payments will be made, is it cash on sale, or are your terms 30 days, for example. You should also factor in any planned marketing activity that may see an increase in sales.

If you haven’t got any income or sales figures from the previous year because you are just starting out, tally up what your expected costs are instead to see the number of sales or level of income you need to generate to cover it. 

You also need to estimate other sources of funds than sales, such as a loan being paid back, the sale of an asset, tax refunds or a government grant. 

Step 2. Estimate your cash outflow

Next, work out what your running costs are, such as administration or operational expenses. What does it cost to produce your goods or services? These are different for every business. 

On top of those standard expenses you should also look at expenses and ways funds leave a business. For example, buying new assets, loan repayments, investing or saving for the future.

Step 3. Choose a dedicated business account

Be sure to have a dedicated business account, and there are some great options around, including the American Express Business Card range. Both credit cards and charge cards in the Amex range offer benefits to business owners, including cashflow days.

For example, the American Express Qantas Business Rewards Card is a charge card with no pre-set spending limit or interest on purchases, as long as the balance is paid in full each statement period. It is a good option for businesses with the need for greater spending power and a consistent cashflow. 

Charge Cards also have a flexible payment option (FPO), which allows businesses to carry over a portion of the monthly balance up to the FPO limit and pay it off over time, instead of in full each statement period (interest charges apply).

Another good option for businesses who want access credit and the flexibility to pay off their purchases over time, according to their cashflow, is the American Express Business Explorer Credit Card. This provides businesses with up to 55 interest free days.

Step 4. Review and update

To get the most out of your forecasts it’s important to update them with accurate information against your actual business performance on a weekly or monthly basis. This will help you to manage your cashflow more effectively.

So, make sure you go back and check your estimates against the actual cashflows for the period. This will highlight any differences so you can see where your cashflow didn’t meet your expectations and help you for the next month’s forecast.

Read now: Five ways digital tools can help boost cashflow