Understanding what sort of success you anticipate your business to encounter can be easily done with the use of cash flow forecasts.
A cash flow forecast is, essentially, what you estimate the flow of money both into and out of your business is going to be over a given period. Generally, this is over the next 12 months, but it can be week to week or month to month, depending on your needs.
Why you need a cash flow forecast
A cash flow forecast is an invaluable tool for helping businesses predict when they might experience periods of time where they have either a surplus or a shortage of money flowing through the business.
This will help you to plan for such eventualities, to keep your business on an even keel throughout the year. They can also be used to anticipate how a new hire or the purchase of new equipment might affect your finances, and if you can really afford it or not.
As a business owner, you want every piece of information possible to inform the decisions you make. A cash flow forecast can give you a valuable incentive to help make the right choices.
How do you make a cash flow forecast?
On its most basic level, a cash flow forecast begins with you estimating your general sales over the period of time you want the forecast to account for, say 12 months, for example, ideally using the previous year’s sales as a guide.
After you’ve done that, consider the costs that you’re likely to encounter. Don’t just think of what was spent last year; think about what you’re likely to need in the near future and account for it. Also, account for any employee wages or tax payments you may have to make.
After you’ve got your cash forecast, the work isn’t done however, because you need to keep it up to date and you need to properly implement it. An up to date cash forecast is a massively helpful tool in helping you make prudent business decisions and allowing you to predict periods of potential financial instability.