Adrians Update

Many business owners may need assistance to prepare an effective cashflow forecast, which is one of the most important business tools at their disposal.

Every business will inevitably experience some cashflow headaches.

The key is to be ahead of the game and to foresee occasions when money could be tight so you don’t have to seek urgent bank finance, or put off an important business purchase. Quarterly BAS payments – whereby businesses effectively act as a tax collector of GST and Pay As You Go payments for the Australian Taxation Office – can also create cash shortfalls.

This is where cash-flow forecasting can make a real difference.

What is it?

A cashflow forecast is used to map out your business’s financial position to ensure you don’t get yourself into financial difficulty. In essence, it provides visibility around your monetary requirements, especially for start-ups with cash uncertainty, or for funding growing businesses that want to invest in new products, premises or staff.

Having accurate cashflow projections can help you determine if you need to cut overheads, generate more sales, or seek new funding.

What tools can you use?

To initiate cashflow forecasts, some businesses still rely on Excel spreadsheets or templates they download from the internet, but specialised software programs are the best option.

Such software can help you plan three-way projections that link your profit and loss, balance sheet and cashflow.

The other main advantage of software tools is that they can help test how your business will perform under different scenarios. During the past two years, for example, COVID-19 has shown that left-field events can occur and it is wise for businesses to test possible market changes such as shipping cost spikes and supply chain delays.

Other market forces can be assessed, too. What will be the impact on the bottom line if interest rates rise? What happens if there are currency fluctuations? You can analyse numerous financial scenarios and move forward with greater certainty.

How does it work?

Setting up a cashflow forecast involves a few typical steps:

1. Determine your timeframe – forecasting plans can cover anything from a few weeks to many months, but 12 to 24 months is a common period for businesses with predictable sales pipelines and data from previous years.
2. List all your business’s incoming cash – this can cover sales you’ve already made, forward orders you’ve received, and projections of future sales based on past performance and enquiries from customers.
3. Record your monthly expenses – this includes your overheads or fixed costs such as rent and wages, your operating costs such as payments to suppliers, any one-off purchases and annual payments, plus any money you’re likely to draw from the business for factors such as marketing and advertising.
4. Work out your running cashflow – add your income to your opening bank balance and subtract your expenses to find out if you have a positive or negative cashflow. Do this throughout the year and you’ll have a clearer picture of your business’s likely cash position.

The above steps provide a basic overview of cashflow forecasting, but the process can be complex and business owners may make misjudgements setting up these forecasts. For example, they may not calculate tax scenarios properly, or they can ignore issues such as whether debtors or creditors are increasing.

This is why tapping into the experience of trusted financial advisors is such a smart step. They have seen it all when it comes to budgeting and cashflow, and they can play the devil’s advocate and ask questions that fill in the gaps. Have you allowed for wage increases? Have you factored in capital additions? And so much more.

Strategic planning is so crucial for any business. Calling on business advisers to assist with cashflow modelling can help your business get the right financing from a bank at the right time.

It’s often hard to take yourself out of the day-to-day duties of running a business to sit down and tackle cashflow forecasting. But if you don’t, you risk ending up in a world of financial pain.

To find out more about cash-flow forecasting, speak to one of our Adrians Accounting partners.