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If a business runs out of cash and is not able to obtain new finance, it will become insolvent. Therefore, it is a poor excuse for management to claim that they didn’t see a cash flow crisis coming.
In business, “cash is king”. Cash flow is the life-blood of all businesses – particularly start-ups and small enterprises. As a result, it is essential that management forecast what is going to happen to cash flow to make sure the business has enough to survive.
As a small business accountant in London, the Accounts & Legal have worked with many businesses from a range of industries to help them produce cash flow forecasts which, in turn, have propelled the performance and growth of these companies.
How to do a cash flow forecast
With the help of Excel, most business owners should be able to manage a working weekly cash flow forecast. To help you focus on what cash your business needs, it is good to keep a rolling cash flow forecast which predicts cash flow about three months into the future. This will give you at least three months’ notice of any problems.
A rolling cash flow forecast means you’re going to be updating your cash position at least once a week. Keeping a close eye on your cash position means that you will have the opportunity to sort out any issues in good time.
A quick tip for capturing all your regular fixed costs is to look back over your bank statements for the last three months. You will also know from your incoming invoices or purchase orders who you owe money to and when it needs to be paid.
Predicting sales can be tricky, but the process can be greatly simplified by predicting activity over a shorter period.
If you’re a manufacturer, you’ll have a bunch of live quotations out with customers at any one time. You should be able to predict reasonably accurately from past experience what proportion of these will turn into firm orders.
You should certainly know the length of your manufacturing cycle and what terms you’re selling on. From these pieces of information, you can predict when you’ll be receiving the cash.
For wholesalers or retailers, which sell on a more immediate basis, look at your historical data of sales in the relevant week last year and adjust by what you know about major customers or current market activity.
Maintaining your cash flow forecast
Every week you should set aside time in your diary to update the cash flow forecast. Add another week onto the end of it and modify any numbers that you know have changed in the past week – for example, if one of your customers has told you that payment will be delayed for another month.
You can also use your rolling cash flow to answer “what if?” questions.
For example, what would happen if you got an unexpectedly large order or your key supplier suddenly wanted payment on delivery rather than allowing 30 days credit?
You can also model the impact if you changed your payment terms. For example, if you wanted to take less of a deposit on payment upfront.
By getting into the discipline of updating your cash flow each week, you will have a much better grasp on how your business works and which operational areas drain cash from the business.
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About the Author
Here at Accounts and Legal we know that good data can help you make the right decisions for your business and that without data you might just be rolling the dice.
We work with our clients to ensure that they have the best possible data about their business with up-to-date financial data available on the cloud at the push of a button anytime, anywhere.
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