The Importance of Cash Flow Forecasting
Finances are often one of the biggest challenges for owners of SMEs. So many of them started out just doing what they loved and were good at—and a few years down the road have found themselves with employees, overheads, and a lot of financial responsibility.
That’s not a bad thing, of course. We love to see Kiwi businesses growing and evolving! But for someone who prefers being on the tools, it can feel a little overwhelming. Of particular concern to many of the business owners we speak with is the uncertainty: not knowing how to ensure that they will have what they need to cover their crucial expenses.
That’s where cash flow forecasting comes in. It’s a crucial skill and practice for small business owners and even sole traders. Read on to find out more.
What is cash flow forecasting and why do I need it?
According to business.govt.nz, a cashflow forecast is: “in essence a cashbook that projects you or your business’s income and outgoings for any given period in the future, eg week, month, quarter or financial year.”
The forecast may be presented in a spreadsheet but accounting software platforms (such as Xero) often have their own forecasting functionality. It is a compilation of important information:
Your starting balance or projected starting balance for the period in question.
Your predicted income.
Your estimated outgoings.
Your projected ending account balance.
What’s left over.
This will give you an accurate snapshot of your financial health, your ability to cover your expenses, and what you will have available to play with and invest in growth. It is the foundation for an effective budget.
Forecasting will be hugely useful to you as you plan and secure the financial future of your business. It allows business owners to make informed decisions and manage their cash flow better. Often, it will reduce or eliminate the anxiety of uncertainty: not knowing whether you’ll have cash on hand to cover the basics.
Stability is valuable, and cash flow forecasting can give you that. When you have a solid overview of what’s coming in and what’s going out, there’s no need to panic about the next bill.
Getting the details right
Any cash flow forecast is only as good as the information it’s based on! A lot of it requires prediction, but prediction based on past figures and any other relevant information such as the state of the economy.
There are several tools available to help you to make predictions or calculate expenses accurately. Inland Revenue’s benchmark figures for your industry are a good place to start for income prediction for newer businesses without their own data. Stats New Zealand also has an annual enterprise survey which could be useful. This employee cost calculator is a good way to get an idea of total costs for current or future team members.
Of course, your accountant is a great resource for financial information and may be able to help you to create an accurate forecast.
Do tradies need to do a cash flow forecast?
Yes, you do. Tradies, consider this your reminder: a cash flow forecast will make your finances easier and less stressful. Here are a few reasons why:
Trades businesses have many overheads, so cash flow problems are common. There are vehicles, premises, materials, and more to think about. Planning is extra important!
Whatever the size of your business, cash flow is the lifeblood. Understanding what’s coming in and what’s going out plus—crucially—how they overlap allows you to make good, informed decisions. Cash flow problems happen when your ingoings and outgoings aren’t aligned well. With a forecast, you can plan ahead to always be able to cover operational costs.
Profit is important, but so is good financial management. With good oversight, you will be equipped to invest in growth opportunities plus build great relationships with suppliers and customers.
With a cash flow forecast, you can decide where money is best spent. Hiring an office manager or using a VA? Opting for that job management software you’ve always wanted? Upgrading your vehicles? These investments should be made based on accurate financial information.
Debt management is made easier with good cash flow forecasting. Debt can be a useful tool for financing growth, but you should always have a plan to pay it off. Incorporate this into your cash flow forecasting and monitor your debt-to-income ratio to maintain a good credit rating. When you know what your cash flow situation is, you may see opportunities to pay off debt faster.
Here at Released, we are the biggest cheerleaders for trade businesses—we want you to be equipped for success! If you haven’t started cash flow forecasting, get on board. And if you need help with your administration or digital marketing, get in touch!
