Cash flow forecasting is, hands down, one of the most important things your business should be doing. In short, its how your company can predict your annual profits vs. your end-of-year debt. It also allows you to get a clear glimpse of where you are making the most and see who you owe money. It will help you set your financial goals for the next year.
So how do you go about setting up your cash flow forecasting? Here are 4 tips on how to do so (and make it as accurate as can be).
1. How Much Money Will You Be Bringing In?
The first step in any cash flow forecast is to estimate how many sales you think you will be bringing in either weekly or monthly. A great way to come up with these estimates is to reference your previous sales history. Look at the past couple of years and try to get a good idea of, considering the past year’s performance at that time, what kind of weekly or monthly sales you expect to see. Obviously your sales won’t always be consistent, so take into consideration patterns that are the same each year (seasons and holidays, for example) and factors that could change each year, such as trade shows or promotions, when making your projections.
It’s very important that you think in length about your future plans. Any new marketing efforts you make or products you bring into the mix should allow you to increase your sales forecasts. On the other end, if, for example, you know of a new competitor entering the market, you might want to drop your figures a bit as they may gain a bit of your market share.
If you don’t have previous sales to reference (as you’re a new business), try to put together an estimate by looking at industry standards, considering performance of similar businesses, or even a customer survey.
2. Consider the Terms On Which You Will Be Paid
If you’re an experienced business owner, than you know that you don’t always receive the money you earn immediately. For many of your sales, you could be waiting 30+ days to see that cash. Therefore, it’s crucial when doing a cash flow forecast to estimate when you expect payment from your sales. You might be a retail shop who gets all money at the point of sale, but for those that operate on traditional trade credit
or simply just bill your customers, you need to evaluate what your average DSO is and consider this in your projections. This way, you not only know how much you expect to make, but when you can expect to receive it.