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The need for strategic cash flow management

Are you forecasting your cashflow?

Cash flow problems are the reason that 82% of small businesses fail. One of the ways you can prevent your business from being one of them is by using a cash flow forecast.

Small business owners are often faced with stressful financial decisions and periods of uncertainty. Having a cash flow forecast can help your business avoid cash shortages by allowing you to track whether your spending is on target, prepare for business expansion, plan for upcoming cash gaps and plan budgets. Here are some tips on cash flow forecasting to help your business be in control of its finances.

Prepare a sales forecast:

Existing businesses can look at past year’s sales figures, taking note of busy and quiet periods, and prepare an income prediction based on historical trends.

If you’re a new business, you can start by making cash outflow estimates. This can help you plan for what sales you should aim for to cover this and make estimates of predicted sales.

Knowing how much money you’ll have in a week or a month is central to being able to budget and know when to pay your expenses. Whether you receive customer payments at the time of sale, or you receive payments based on a subscription or service, you can schedule expenses and budget based on payment periods.

Account for other income forms:

Your business may generate income from sources other than customers. Having an estimate of what income you’ll receive and when allows you to refine your budget and plan around payments. These income sources could include:

  • Grants (such as government grants)
  • Tax refunds and GST rebates
  • Investments in the business
  • Deposits
  • Loans

Estimate your expenses:

Your cash flow forecast should include all your predicted expenses, giving you a detailed outline of the amount you’ll spend and when to help you determine a budgeting schedule and avoid cash shortages.

Expenses to consider in your forecast include:

  • Bills such as electricity, water, rent, telephone and internet.
  • Staff wages, including taxes, superannuation or bonuses.
  • The cost of supplies and equipment.
  • Packaging and delivery services.
  • Software subscriptions, such as an office messaging system, accounting system, antivirus protection, website developing etc.
  • Maintenance and repairs.

Being able to effectively manage your cash flow is key to the long term survival of your business. It will also allow you to maintain enough working capital to operate through quiet periods.

Your cash flow impacts on your future spending decisions and the direction your business is likely to take. So keeping your finger on the pulse at all times can help ensure you are making the right decisions.

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Mark Holton