18 June 2020

5 simple steps to cash flow forecasting

As business norms are disrupted by the fallout from COVID-19, it’s all the more important to keep track of how cash moves through your business. Here are some tips to help you build a robust cash flow forecast.

1. Keep your books accurate

To ensure you always know what’s coming, it’s critical to keep your accounting up to date.

Think about investing in cash flow forecasting software. Unless your income and outgoings are very simple and predictable, it will probably be worthwhile.

Choose a package with the right features for your business. For instance, make sure it can be plugged in to your point-of-sale or other existing systems.

Ask around for word-of-mouth recommendations about good software and seek out reviews online.

2. Plot your finances realistically

Look ahead for a year. As in any system, your forecasts will only be as good as the data you feed in.

Map key payment dates. Regular outgoings such as salaries, rent and tax are easy to predict.

On the income side, use past experience as a basis for estimating future sales and margins.

Include new customers and projects only once they are confirmed – lean towards pessimism rather than over-confidence.

3. Set up trigger warnings

Make sure you’re alerted as early as possible to any possible problems.

For example, set minimum levels that your leads, orders or sales should be hitting. The system should warn you automatically if figures drop below those levels, or if a big customer stops buying from you.

In the same way, you might want to know if stock levels dip below an agreed limit or set a maximum limit for stock lying unused.

The other key area to monitor is any major payments into the business that are late or disputed.

4. Act on the data

Ideally your forecasts will provide peace of mind. If it seems possible you won’t have enough cash to cover essential outgoings, action is required.

Avert a cash flow emergency by adjusting your spending, offering incentives for clients to buy quickly, reducing stock, or injecting cash into the business. You may also need to step up credit control to pursue late payments.

Equally, an unexpected spike in cash might provide an opportunity to plan expansion or investment.

5. Get regular updates

Track your actual business performance against the forecast. Do this at least monthly, and ideally once a week, to ensure total visibility of your cash flow.

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