Businesses require money to be healthy, just as plants need water. Cash flow is all about money running through your organization, which is crucial.
Any discussion of cash flow must include cash flow forecasts. Planning and making important choices help you forecast how much money you could have in the future. Cash flow predictions are effective financial tools, whether you’re trying to grow your company, apply for a loan, or just want to know how it’s doing.
This post will examine the fundamentals of small company cash flow forecasting. You’ll have everything you need to get going after reading it.
What is cash flow?
The first thing you must comprehend to learn about forecasting is cash flow in general. The most important thing to remember is that when we talk about cash flow, we’re talking about both the money coming in and going out of your organization.
Most of the money that enters your firm comes from sales, but you may also have a loan, a line of credit, or a recent tax refund. Regarding the cash leaving your firm, we’re referring to all the money you spend on rent, taxes, and wages and additional outlays like marketing, insurance, and other costs.
Imagine you own a dry cleaning company where most of your revenue comes from cleaning and adjustments. You will also get the loan amount if you recently took out a loan to purchase new equipment. Along with expenses like taxes, operating costs, and loan repayments, most of the money leaving the business will likely go toward paying vendors, employees, and your compensation.
What is a cash flow projection?
Using cash flow projections, you can predict how all this money coming in and going out will behave in the future. However, to create a prediction, you must know how money has historically moved through your company.
Therefore, a cash flow prediction for a new company can vary as it won’t have as much financial history, which serves as the foundation of a forecast. Longer trading experience and sound financial records will put you in a better position to make longer-range predictions.
What is a cash flow projection reveals?
In essence, cash flow predictions are elaborate spreadsheets. The rows below are for your monthly income and spending, with the months of the year shown at the top. You may include the amount of money coming in each month and all the money leaving the house, split down into general costs and loan repayments, for instance.
Your net cash flow, the difference between the amount of money going out and the amount of money coming in, is the most crucial figure in your projection. Your company’s net cash flow reveals whether it is making more money than it is spending or vice versa.
With forecasting software that can link to Sage, you may obtain something more illustrative that uses a line graph to show the peaks and valleys of your cash flow.
Why are cash flow projections crucial?
So how can a firm benefit from a cash flow forecast? Most importantly, they serve as excellent financial gauges that let you know what type of strain your company may be under. Numerous factors, such as unpaid invoices or unchecked expansion, may result in cash flow troubles, and forecasting can help you identify such problems early.
You may make wiser selections when you are aware of what to anticipate. A cash flow projection makes it simpler to determine if you can afford to recruit your next major employee or buy new equipment.
This information is also important to lenders. When you need to borrow money, a cash flow prediction may demonstrate your company’s profitability, just as paystubs are used for mortgages.
Making a cash flow projection
A cash flow prediction template, a ready-made spreadsheet, makes forecasting simple. One is included in the free small business toolkit from Sage.
You may discover more details here if you want to dig further. However, the following are the essentials you’ll need to create your cash flow forecast:
- Having a bank balance: Find your balance at the beginning of the month you’re starting your prediction.
- Your earnings: List the monthly revenue using invoices, active contracts, sales data from prior years, and other items like grants and tax refunds.
- Your expenses: List your monthly expenses, including rent, wages, and gasoline for your vehicle.
Things might become complicated if you’re not utilizing software to manage your income and expenses. Learn how Sage’s Making Tax Digital hub may assist you in maintaining better digital records.