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Many businesses fail in the first few years, and the most common reason? Cash flow. You may be doing pretty well on the sales front, but are you being paid on time? Or you’re covering your monthly outgoings just fine, but what about that big IT purchase you’d like to make in 9 months? Don’t fall into the trap of making decisions based on the money you have in the bank - your balance is an illusion. It’s entirely possible for your business to be profitable and yet still run out of cash.

What’s the solution I hear you ask

That’s easy, a cash flow forecast; every business, young or old, should have one. Carefully monitoring your income and outgoings can help yours to be one of the businesses that make it. Forecasts are similar to budgets, although they have the added advantage of helping you amend your spending during the year as needed. It will definitely benefit from some time being spent making sure that everything is included, but you’ll soon find that it’s worth it’s weight in gold.

5 steps to creating a good cash flow forecast

  1. Sit down and look at your responsibilities each month for the next year, such as salaries, rent, insurance, etc.
  2. Add in any additional payments or changes to your business that you’d like to make throughout the year, such as upgrading your computer or opening a new shop.
  3. Estimate your income. You might find it useful to create a separate document for this that then feeds into your forecast. This is where you might want to look at worst case, realistic, and hopeful, to see how the impact each scenario would have on your cash flow.
  4. When estimating your costs and income don’t forget to take into account payment terms and anything else you’re aware of, for example that client who always pays three weeks late (need tips on reducing late payments?)
  5. Subtract outgoings from income, and that’s your forecast of cash flow.

Once you have your cash flow figure for each month it’s time to look at how it looks throughout the year.

Positive each month Fantastic, keep it up!

Mainly positive but some negatives Not necessarily an issue, but pay attention to those; if your business is seasonal, knowing how much of a war-chest you need to build up to get you through the leaner months is invaluable.

Mainly negative This needs to be addressed, and soon; where can you reduce expenses, and what do you need to do to increase income?

If you’re interested in finding out more about how a cash flow forecast can help your business, why not in get in touch today.