Understanding how to forecast your cash flow is a crucial part of the platform for a successful business.
The number one rule of cash flow planning is to know as much in advance as possible what will be coming in and going out of your bank accounts and when things are likely to happen.
1. Make a list
A lot of businesses have a relatively similar spending pattern month on month. Print out a list of your current account and credit card statements. Highlight and then make a list of all the direct debits, standing orders, regular payments, salaries, that come out of your bank account and credit cards each month.
Next make a list of all the things you spend money on, but aren’t fixed or regular payments – things like travel, entertainment, marketing, advertising, legal costs etc.
Finally, make a list of any recurring revenue that you expect to generate in each month.
2. Compare this to your accounts
Do a cash summary report and compare what you have in your list. Does anything stand out that you hadn’t spotted?
Make a list of any “one-off’s” and see if there is a pattern that you weren’t aware of.
3. When are your invoices really going to get paid?
Look at your invoices, and list when you expect it to be paid. How reliably can you predict this? What invoices are overdue? Is there anything that you’ve forgotten to invoice for? What milestones do you need to hit to generate the next payment?
4. Finally: the pipeline
What sales have you got on the horizon? What pitches are you waiting to hear back on?
Be conservative here – factor in the costs of completing the sale (i.e anything that costs you more because you’re doing the job). For instance, if you run a digital agency make sure you include any materials, freelance costs, and likely travel expenses.
That’s the basics of setting up a forecast.
Accounting software can help you model your cash flow and there are also add-on products that make cash flow forecasting so much easier to prepare.
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