Many businesses, and specifically startups, don’t have a cash flow forecast at all, let alone an overly optimistic one. This can just be an oversight. It can also be that the owners find the idea of creating a cash flow overwhelming, or they’re unsure of where to start. If you’re one of startups feeling unsure, you might find this free 7-day guide useful.
For more established businesses, it’s possible that you don’t have a forecast because you’ve been able to make do up until now: continuing with this approach may start to hinder rather than help. Here’s how a realistic cash flow forecast can help you going forward.
Cash flow goes up and down all the time
Cash flow goes constantly goes through these up and down cycles, which is why it’s so important to understand it so you feel in control.
Managing your cash flow makes it easier to predict, and do something about, low cash months before they happen. If, for example, June or July were looking as if payments in were going to be lower, you’d be able to act in advance to bring the gap. For example, you could move money about, apply for a loan, send out invoices earlier than usual, or negotiate to pay suppliers a bit later.
Cash flow depends on the type of business
Businesses that sell products rather than services will likely have a different cash flow model:
- A business that sells products will have to pay for stock in advance which would create a dip in cash flow prior to receiving income.
- A business that sells services could have to wait for clients to pay you resulting in delays and a dip in cash flow after the work has been completed.
Using technology to manage your cash flow
Like most things in the modern age, technology can help you manage your cash flow rather than having to do it manually. We have some clients use a Xero add-on called Float, in which you input your ingoings and outgoings to receive an overview. As ever, this overview will only be as good/accurate as the data you put into it.
There is also the Budget Manager feature on Xero, which provides a clear report based on comparative data from last year’s records. You can then use this info to set budgets and compare profit and loss.
So, we’d say hope for the best but prepare for the worst i.e., don’t limit your ambition – you can still push to achieve your goals. At the same time, protect your business and your finances by being conservative in your cash flow planning (and definitely do cash flow planning).
If you would prefer some personalised advice on managing your cash flow, get in touch and we can help.
