Running your own business has plenty of challenges and one thing that many small businesses struggle with is their finances.
Knowing how your business is going to look in six months or a year can be a real mystery to some people, and this makes things like equipment purchasing or hiring staff an uncertain process.
Luckily, there's a fairly simple fix for this: cash flow planning.
What is cash flow planning?
Cash flow planning is a forecast of how your bank account will look in the future. While there is an element of uncertainty about this work, it does help to paint a picture of where a business will sit financially in the future.
By knowing this, you can then work out how many more clients you need to reach a goal, what effect changing your prices will have and how much you can safely afford to spend to improve your business.
There are two main types of cash flow forecasts: short-term and long-term.
Short-term forecasting is useful if you want to make a big purchase. Knowing the impact this will have on your business can help you decide whether this is a good idea or not.
Long-term forecasting is useful for growth strategies. This can help you shape and grow your business more efficiently.
What to include in your cash flow planning
What you include in your forecasting depends on what you're trying to achieve, but there are several key factors to take into account.
The first step is to forecast your expected sales. You can do this based on weekly or monthly sales using past figures as an indication. Remember to factor in things like seasonal trends and one-off events in your forecasts.
Other things that may change your predictions are marketing pushes and competitor activity. It is also important to factor in your payment terms to your forecast.
The other important thing to include is your likely costs. Some of these are fixed and easy to predict – rent, loan repayments and subscriptions. You'll also have a good idea of staff payments and stock orders that you'll need to pay.
There are, however, uncertainties over other expenses – for example, whether you need to pay for a one-off repair or purchase. Using historical data can help you estimate how often you need to do this and give you a reason to put money aside so you're not hit by unexpected costs.
Keeping cash flow forecasts up to date
Having a cash flow forecast helps to make management decisions easier. However, it's not a one-off job. Businesses can change rapidly and what was true a few months ago may be wildly inaccurate now, so it's important to do regular forecasts.
This, of course, can be time-consuming and if you're not used to doing forecasts like this it's easy to make a mistake that has a huge impact on your business.
Getting professional help from an accountant in Newcastle can help take the stress away from you while helping you to become more productive and get the most out of your budget.
At Active Accounting Group, we have the tools to support you in managing and monitoring the flow of money through your business. Call us on (02) 4044 1245 for a Free Cash Flow Consultation.