Hitachi Capital Franchise Finance explains the importance of creating an effective cash flow forecast for your business
A good cash flow forecast is a valuable tool. But how do you plan ahead if you’re just starting out or a new business owner? And how do you create a cash flow forecast that’s useful?
Here, we’ll explain how to create a cash flow forecast that could help take the pressure off your small business in the short term and make it easier to grow in the long term.
Why do you need to create a cash flow forecast?
Understanding your future cash position helps you to make better decisions about funding and how to grow your business responsibly. It’s essential information if you’re hoping to expand your franchise operation to multiple sites, buy more stock or take on extra staff.
A good cash flow forecast helps you to understand if you’ve got enough money coming in to cover all your overheads and pay staff and suppliers. If you don’t have enough cash coming in, you can’t pay your bills on time. This affects your credit ratings and, ultimately, could lead to the end of your business.
Why is a cash flow forecast so critical?
Everyone’s in a different situation. However, every business is dependent on the activity of its creditors and debtors and it’s important to maintain a healthy balance between the two.
If you get paid late by a customer, you have to settle an invoice earlier than you expected or the business owner doesn’t plan properly and takes too much money out of it, your business may become financially vulnerable.
Low cash levels means extra pressure for you to deal with. It takes away some of your freedom to make choices about how the business grows or runs.
The answer to this problem is to project your cash flow and try to predict any action that’s needed to prevent that from happening. This is called cash flow forecasting and this is the simplest way to set up a 13-week cash flow forecast:
How to set up the simplest cash flow forecast
You’ll need to reconcile what’s coming in and going out regularly. Generally, if you’re seeking funding, cash flow forecasts are produced over 12 months.
However, many small business owners find it’s beneficial to update their cash flow on a weekly basis over a 13-week period. 13 weeks is just over a quarter of a season in calendar terms. It’s also the usual length of time used by accountants, investors and lenders to assess if a business has a positive outlook for its cash flow.
You may be surprised by how far forward you can project your income, particularly if you’ve already started issuing invoices. But you’ll also see very quickly how useful a cash flow forecast is for monitoring who you’re expecting to make payments and what the impact might be if those payments are delayed.
Try it for yourself - manage your business the right way.
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