There are always going to be risks in business. However, by minimising potential risks, your business will have a better chance of success. And one way to do so is through cash flow forecasting.
By creating a logical estimate of your future sales and expenses, you can better gauge the financial status of your business. This can allow you to create informed business decisions and prevent financial loss.
To create an accurate cash flow forecast, here are some things you need to do.
Conduct Sales Forecasting
Essentially, a cash flow forecast involves estimating your sales and expenses. While expenses may be easier to estimate since they often come in the same amount each month, the same cannot be said about sales.
To gain an accurate estimate of your future sales, you’ll have to conduct sales forecasting. This often involves studying trends and looking at historical data. You also have to factor in seasonality. For example, if you own a costume shop, you can reasonably expect a spike in sales when Halloween is coming around.
Consider Both Profit and Loss
When creating an accurate forecast of your cash flow, you can’t just consider the profit. You also have to put into account projected costs. This can help paint a better picture of your business’s profitability.
Include Projected Payments
Part of the cash flow is the money going out, including expenses and payments made for acquired products or services. While sometimes these payments are made immediately, other registered payments do not require the money to leave right now. The payments may be made in the next month or sometime in the future. In this case, it’s important not to forget to include these projections in your cash flow forecast.
Consider Variable Costs
While some costs may be fixed, such as interest rates and VAT, other costs may vary depending on a few factors. These are what we call variable costs. Since it’s tough to estimate a variable cost, it’s best to just allow for some wiggle room in your calculations.
An example of a variable cost is your utility expenses. While you may expect to pay for this each month, the actual amount remains unknown until you get your bill. So, the best thing to do is use an average and give a little bit of allowance for deviation.
Use the Current Cash Flow as Reference
As much as possible, you’d want to avoid conducting inaccurate cash flow forecasting. However, unrealistic expectations for your cash flow may lead to some inaccuracies in your forecast.
To prevent this, it’s best to use your current cash flow as a reference. If you notice large discrepancies, this may indicate missing variables in your calculations.
Accurate cash flow forecasting is essential as it can help you make better decisions for your business. To achieve this, you’ll have to conduct accurate sales forecasting and consider factors such as profit, loss, projected payments, and variable costs. And you can double-check with your current cash flow to see if there are any discrepancies that may point toward missing variables.
Make better financial decisions for your business with the help of BarrettStacey Accounting. We are a friendly and approachable team of professionals that provides accounting and bookkeeping services in Bristol. From start-ups to long-established businesses, we can help to keep you on top of your financial paperwork. Request a call back now!