Best use of a business cashflow forecast

For the business owner who has successfully created a cashflow, cashflow forecasts are an indispensable discipline of financial planning. They provide informed predictions to help make better business decisions and plan for the months ahead.


Predicting ahead

Using your past financial data and a simple cashflow forecast, you can accurately predict your company's future economic performance. You can also avoid financial difficulties and predict peaks and troughs of cashflow over the financial year. Give some thought to sensitising your cashflow forecast so you have an idea of a pessimistic, middle-of-the-road or optimistic forecast. You are then showing yourself, investors or the bank that you have considered all market conditions—hope for the best and plan for the worst.

When completing your business forecast, compare your best guess to your actual numbers - this will allow you to keep on track and quickly adjust as and when needed, or to be able to identify any bumps in the road and provision for them.

Why you need a cashflow forecast

Cashflow forecasting helps you understand your business's operating cycle and prevent financial trouble. For example:

  • When do you get paid for your sales?
  • When do you need to pay your expenses?
  • Are you paying off business loans? 
  • What will the impact of new asset purchases be? 
  • What if you add more employees or sales fluctuate (up or down)?
  • Will you be able to meet your tax obligations?

The timing of money coming in and going out is crucial to understand your monthly cash position and potential funding lines you might need to bridge any gaps. 

Smoothing out the bumps

If you forecast your business might struggle to cover costs in a given period, identify if you can:  

  • Speed up the receipt of cash inflows.
  • Review the terms you currently provide customers and ask for pre-payments.
  • Check how you receive customer payments and provide alternative channels (i.e. digital solutions direct to your bank account). For example, you could offer prompt payment discounts or a reward system to encourage faster payment.
  • Extend your payment terms to suppliers or pay through a different channel (such as credit card) to be closely aligned with the timing of income receipt.
  • Identify which expenses are fixed and cannot be changed and which ones are variable. Then, deep dive into both types to see what bills you can eliminate, reduce, re-negotiate, or extend terms on. This will aid in reducing overall costs and smooth out cashflow troughs by moving expenses into the period where your income is received.
  • Check if your business is exposed to any seasonality that you need to factor in. For example, consider holiday periods when you may close or become much quieter. On the flip side, are there months when you will receive the lion share of your income? Then, think about how you will allocate that money to cover costs at a later date.

Where to get support

If you're unsure about cashflow forecasting, then consider paying for expert assessments, even if it's just the initial stages. If you don't have an existing business relationship, we are happy to refer you to someone suitable from our networks.

  • When it comes to critical business decisions regarding improving your cashflow, managing risk or planning for business growth, investing in a Chartered Accountant can make a difference. These experts in their field maintain high professional standards and provide the advice small businesses need to help drive them towards a sustainable future. Find your local Chartered Accountant using the NZ/AU Chartered Accountants.
  • Modern bookkeeping services cover all standard bookkeeping tasks and can often help new businesses understand their financial information, improve business systems, and validate any data and reporting. Find an ICNZB Certified Bookkeeper

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How to use a cashflow forecast when talking to your bank

Once you have identified your periods of poor cashflow, you may need to contact the bank about providing some working capital cover. For example, an overdraft facility can assist if your forecast predicts negative cash balances. To help the bank understand your requirements ensure your cashflow forecast contains the following:

  • Details of the figures and data used and why; these are often referred to as assumptions.
  • The bank will need to understand your thought process and methodology used to calculate the numbers.
  • Some background about you, your business and the environment you are operating in. Has this changed?
  • What has caused the need for cashflow assistance? For example, is your business in growth mode, or have you experienced market disruption?
  • What is your business plan?

Whether you are a start-up business or have been in the market for many years, all companies need a good cashflow forecast that continues to evolve with the growth of the business.  

Next steps

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