Best use of a cash flow forecast

Best use of a business cash flow forecast

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

Best use of a business cash flow forecast
    <h3>Predicting ahead</h3> <p>Using your past financial data and a simple cash flow forecast, you can accurately predict your company's future economic performance. You can also avoid financial difficulties and predict peaks and troughs of cash flow over the financial year. Give some thought to sensitising your cash flow 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.</p> <p>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.</p> <h3>Why you need a cash flow forecast</h3> <p>Cash flow forecasting helps you understand your business's operating cycle and prevent financial trouble. For example:</p> <ul> <li>When do you get paid for your sales?</li> <li>When do you need to pay your expenses?</li> <li>Are you paying off business loans?&nbsp;</li> <li>What will the impact of new asset purchases be?&nbsp;</li> <li>What if you add more employees or sales fluctuate (up or down)?</li> <li>Will you be able to meet your tax obligations?</li> </ul> <p>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.&nbsp;</p> <h3>Smoothing out the bumps</h3> <p>If you forecast your business might struggle to cover costs in a given period, identify if you can:&nbsp;&nbsp;</p> <ul> <li>Speed up the receipt of cash inflows.</li> <li>Review the terms you currently provide customers and ask for pre-payments.</li> <li>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.</li> <li>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.</li> <li>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 cash flow troughs by moving expenses into the period where your income is received.</li> <li>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.</li> </ul> <h3>Where to get support</h3> <p>If you're unsure about cash flow 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.</p> <ul> <li>When it comes to critical business decisions regarding improving your cash flow, 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 <a title="Chartered Accountants" href="https://www.charteredaccountantsanz.com/find-a-ca" target="_blank">Chartered Accountants</a>.</li> <li>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 <a title="ICNZB Certified Bookkeeper" href="ICNZB%20Certified%20Bookkeeper" target="_blank">ICNZB Certified Bookkeeper</a>™</li> </ul> <h3>Go digital</h3> <h4>How to use a cash flow forecast when talking to your bank</h4> <p>Once you have identified your periods of poor cash flow, 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 cash flow forecast contains the following:</p> <ul> <li>Details of the figures and data used and why; these are often referred to as assumptions.</li> <li>The bank will need to understand your thought process and methodology used to calculate the numbers.</li> <li>Some background about you, your business and the environment you are operating in. Has this changed?</li> <li>What has caused the need for cash flow assistance? For example, is your business in growth mode, or have you experienced market disruption?</li> <li>What is your business plan?</li> </ul> <p>Whether you are a start-up business or have been in the market for many years, all companies need a good cash flow forecast that continues to evolve with the growth of the business.&nbsp;&nbsp;</p> <h3>Next steps</h3> <ul> <li>See offers from our <a title="Digital cashflow management partners" href="/content/asb/businesshub/en/businesshub/partners.html" target="_self">digital cashflow management partners</a>, including Xero.</li> <li>Use the ASB <a title="Cash flow template" href="https://www.asb.co.nz/content/dam/asb/documents/business-hub/asb-cashflow-forecast-template-v6-june-2020.xlsx" target="_blank">cash flow template</a> to make a start.</li> <li>Use our <a title="Business plan" href="/content/asb/business-banking/en/business-banking/guidance/writing-a-business-plan.html" target="_self">ASB business plan</a> resource to support your cash flow forecast predictions.</li> <li>Use Inland Revenue's <a title="Industry benchmark figures" href="https://www.ird.govt.nz/business-and-organisations" target="_blank">industry benchmark figures</a> to make informed business predictions.</li> <li>Share your cash flow with your banker so they can understand your vision.&nbsp;</li> <li>If you already have cloud-based accounting software such as Xero or MYOB, go there first to use the cash flow forecasting functionality.&nbsp;</li> <li>Get in touch with ASB by <a title="Enquire online" href="https://www.asb.co.nz/small-business-banking/small-business-banking-options.html#contact-us" target="_self">enquiring online, visit a branch</a>, call 0800 272 222 or contact your business banker.</li> </ul>
    <h2 style="text-align: center;">See other offers from our&nbsp;<a href="/businesshub/offers.html" target="_self">digital cashflow management partners</a></h2>