Cash Flow Forecasting

Cash Flow Forecasting

January 31, 2018

For any business, it’s key to understand that one of the more common reasons a business folds, is a lack of cash flow. Cash is the lifeline of a business, it enables the business to function, do its day to day trading and most importantly, pay its debts. If you don’t have a healthy cash flow, running the business is a constant battle.

It’s important to be smart when it comes to spending your money, every decision needs to be taken into consideration when it comes to how and where you spend cash.
Even if the business is working well, succeeding and making sales, cash flow can still be tight. So, what should you do when things are working, but cash is hard to come by?

Likely Causes of Cash Flow

It’s important for businesses to be aware of the difference between cash flow and profit. Even businesses that are profitable can be hit with cash flow issues and end up collapsing as a result. Profits could be high, but if a business relies on credit, then it can be a case of waiting for payments from clients, which don’t come on time.
Cash flow problems can sometimes occur through no fault of the business. Any business can be hit with misfortune and see an unexpectedly large cost put the whole company into trouble. It could be equipment breaking down, or inflation within the market, something out of the businesses control. These sorts of costs can totally disrupt your plans and upset the balance between your incomings and outgoings.

A Cash flow Forecast You Can Follow

Forecasting your business cash flow is one of the most important things you need to plan out, before you start the business. It should be prepared on a monthly basis, including all of your incomings, outgoings, quarterly and yearly payments the business needs to make. This will enable you to keep track of your total cash and see how much you are spending on certain expenditures.
One of the more likely causes that can leave you with cash flow problems, is by not planning effectively enough. Seasonal variations need to be taken into consideration, along with any possible pitfalls. If you rely on certain months, it’s critical that you keep enough money in reserve to survive the remaining months of the year.

Keeping a Healthy Cash Reserve

Creating a successful forecast gives you the room to plan ahead and potentially predict any short fallings. At some point a business is likely to struggle with cash flow, especially a new or young business. The most important this is being prepared for the issues that are likely to occur and have enough cash in reserves to get through the difficult times. Cash reserves are hugely important when it comes to paying quarterly rent, VAT payments or annual tax. If you don’t plan for these properly and keep enough cash safe to pay them off, the business will get into troublesome times.

Efficiency With Incomings and Outgoings

As part of your planning process, making sure you manage your incomings and outgoings as well as possible, is key to keeping a healthy flow of cash throughout the business. The hardest thing to do, is getting clients to pay on time so that the business can pay its outgoings on time. This might seem obvious, but too many businesses don’t put any processes into play, which usually results in clients not paying on time.

When you rely on credit from clients, don’t feel any hesitation to carry out a credit checks. This will give you an idea of how reliable your clients are and how likely they will be to pay you on time. Alternatively, to bring cash in quicker, make it your business norm for clients to pay a percentage of invoices as deposit. Be sure to press clients for payments, don’t be aggressive, but there’s nothing wrong with following up an invoice, or asking for it to be paid on time.

In terms of your own outgoings, if you need to, take full advantage of your own repayment terms. If you have the option to pay within 30 days, wait until the last day if it helps ends meet. When it comes to suppliers for your business, tell them the truth, suppliers want you to succeed and might extend terms if it can help you out.

What Help Can I Get If I’m In Trouble?

Even if the business has already been hit with cash flow problems, there are things you can do to help smooth things out.

Invoice financing can be a brilliant option for B2B businesses. The financing option allows a business to take out a loan, which is based on the value of any outstanding invoices. The factoring company will assess the quality of your invoices and if not deemed too much of a risk, will lend you a sum. They will then collect your invoices for you, take their fee, before returning any remaining cash. It’s a fantastic way to help you free up cash when clients are paying late and it gives owners more time to spend on the business.

For those that don’t have invoice financing as an option, a business overdraft can be a simple solution. An overdraft will ensure you have funds available if you go overdrawn in your account. It will be agreed with the bank beforehand and is designed to meet what the company needs, as long as the bank don’t deem it too high of a risk.

As an alternative to a business overdraft, when in cash flow trouble a bank loan could be seen as another option. Banks have maintained that they are happy to loan, but they have tightened up their criteria when it comes to lending money. If you are already in cash flow trouble, banks will naturally deem you more of a risk, however, if you can prove that the business is genuinely viable, can be successful and you haven’t got in trouble through fault of your own, then banks will loan.

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