The ability to accurately forecast irregular cash flow is essential to any business. If a business runs out of cash and becomes insolvent, it won’t be long before the business fails. Therefore, it is essential that every business develop a cash flow forecast to make sure they always have enough cash.
A good cash flow forecast can help a business owner:
- Spot trends
- Make key decisions such as whether to increase or decrease inventory
- Identify clients that pay late
- Plan for capital expenditures
- Anticipate a cash flow deficit in order to take action to cover it
Many people make the mistake of not knowing the difference between a budget and a forecast. A budget identifies the business’s sources of revenue and expenses, and nets them against each other to show a snap shot of the business net income at a given point in time. Cash flow forecasting, on the other hand, models the business’s financial liquidity over a specific time frame. It takes into account what the business takes in and pays out to identify the surplus of shortfall the business will have in order to plan accordingly.
Here are the 6 best ways to help your business forecast for irregular cash flow:
1. Start with a Budget
A business’s monthly budget will have already identified all the sources of revenue and all of the expenditures, both short-term and long-term, that the business incurs. The purpose of a budget is to help identify which of those revenue sources and expenses are cash-based.
2. Forecast Your Monthly Cash Receipts
Cash receipts include whatever the business collects that can be readily converted to cash. This starts with the collection of your customer accounts receivable and can also include proceeds for financing and interest on short-term investments.
3. Identify and Track Your Disbursements
What does the business actually pay out? Start by listing all the recurring payments you have going out. Disbursements include items that require a cash payment such as payments for rent, utilities, accounts payable to suppliers, payroll, interest on any debt or credit lines, and dividend payments.
4. Take Seasonality into Consideration
Many businesses, such as retailers, are seasonal, with the bulk of revenues occurring during specific times of the year. Your irregular cash flow forecast should build reserves to pay out recurring disbursements during off-season periods.
6. Don’t Forget to Plan for One-Time Expenses
Every business has expenses that they will have to pay in order to keep the business growing, but those expenses are not typically made on a recurring basis. Perhaps you have an essential piece of business equipment that you know will be replaced at some point. Or, your computer system may be out-dated and require an upgrade. Maybe you are outgrowing your business space and need to rent or purchase a larger space. All of these examples are the types of expenses that will have to be made at some point and will require a cash outlay in the form of a down payment or outright purchase. While some purchases can be put off until you are ready to make them, some may have to be made sooner rather than later.
An established business may be able to use last year’s figures as a basis for its irregular cash flow forecast. A relatively new business will need to forecast from scratch. Either way, you should seek expert guidance from experienced accountants.
Nuvest Management Services is a full service, outsourced accounting and finance service company. Our experienced, qualified professionals can customize an affordable financial solution for you based on the services your business needs, whether that be accounting/bookkeeping, financial analysis, financial reporting, payroll, or tax returns and tax strategies.
Call us at (888) 926-9645 or book a consultation so we can start identifying areas in your business that are negatively affecting your profitability and develop practical solutions to fix them. Let us help you focus on what you do best, while we handle the rest.