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Forecasting Cashflow
As an entrepreneur, you know how essential it is that you predict amounts of money entering and leaving your business. But how can you do it more effectively?
Cash is the lifeblood of your business and as such you need to keep track of incomings and outgoings, both now and in the future. Without money your business cannot operate, so it’s important to know what’s around the corner when it comes to your finances.
Forecasting helps you to calculate when you’ll have a surplus or a deficit in your funds. This is clearly beneficial to seasonal businesses, such as those relying on the tourism industry, because they need to plan whether they can survive during off-peak months.
Future money movements will also tell you if and when you’ll need a loan, and will give you a good idea of when is the best time to develop new products or go after new customers.
How far you go into the future is up to you, but as a rule of thumb you should create a detailed plan of the next 12 months – with a particular focus on the next three – along with a concise assessment of the longer term.
Projections are also useful for costing and pricing one-off jobs. You need to know how much money you will spend fulfilling individual contracts – in terms of man-hours, materials and supply costs – so that you know what profit margin you should achieve.
What needs to go in
Even the most basic cashflow forecast should include an assessment of receipts (money coming in); payments (money going out); the amount made when payments are subtracted from receipts (including negative sums); and your opening and closing bank balance.
You must be realistic about your growth targets, even if you’re growing quickly. Because you have been trading for a number of years you can use the following equation: cashflow in the last 12 months + expected growth over the next 12 months (in money terms) = cashflow forecast for the coming year.
This equation should be based on your real-life performance, where money has entered your bank account, and not on invoices or agreed contracts that are yet to generate cash for your business.
You never know, you may need to take your cashflow projection to potential backers such as banks, business angels or venture capital funds. These will not tolerate exaggerated predictions and are experts at spotted white lies.
The way you present your cashflow forecast is up to you, but the standard method is in spreadsheet form, with rows representing income and expenditure, and columns displaying the weeks or months in which the transactions will happen.
Make it easier on yourself
Financial predictions should evolve with your business. They might involve a measure of guesswork at the start, but as you become more established, predictions should be more educated.
It will help to revisit past forecasts to inform your future predictions. They will tell you what level of risk to expect, how many expected cashflow channels fall through, and which unexpected ones sprout up.
But if drawing up spreadsheets and putting together data is not your strong point, then accounting software could be for you. A good software package will help you calculate all your business’ comings and goings, plan for peaks and troughs, and adapt when the unexpected happens.
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