As the new year gets underway do you want to know how your business will fare? Apply the following methods to improve your forecasting.
Forecasting your company's cash flow helps minimise potential risks and can indicate if the company is in a position to grow.
Proper cash flow management is a key. But monitoring all the money coming and going doesn't always provide all the required information you need to make accurate predictions.
The following tips and areas of focus should contribute to a better strategy for your forecasting.
Tip #1 - Estimate Future Sales
The accuracy of cash flow forecasting relies on multiple variables, of which arguably none is as important as the sales/fee forecasts.
To improve accuracy, the estimate should depend on the following series of factors:
- Clients/Customers (review the last 12 months to get an idea of who they might be)
- Resources (how many can you realistically accommodate)
- Competition (who else is out there offering the same services)
- Pricing (what price are you charging)
Tip #2 - Estimate Profit and Loss
After your sales projections, you need to factor in the projected costs, too. This gives you more information about your profitability.
Of course, you have to know both the expected revenue and the cost of sales to estimate projected gross and net profits.
Tip #3 - Perform Monthly Sales Estimates
Some businesses don't turn out enough data in a single week to make accurate projections. This happens because customers sometimes delay payments. Or the money simply doesn't come through in time to match the daily revenue on the books.
For that reason, it's important to stick to monthly estimates with consideration of any known delays.
Plan how many sales you need to make in a month, plan where they will come from or how they will be achieved.
Tip #4 - Include Payments Due
Sometimes a business might have to pay for expenses, services, staff, or purchases. And those types of payments usually find their way on Profit & Loss statements.
In some cases, however, a required payment does not mean that the money has to leave right now. That money could leave the account only in the next month, for example.
Hence, you have to include projected payments in the cash flow forecast to further improve its accuracy.
The following are examples of payments due worth considering:
- Interest rates on loans
- PAYG Withholding taxes
Tip #5 - Compare with Current Cash Flow
One of the causes of inaccurate forecasting is unrealistic expectations.
Compare to what is actually occurring on a regular basis.
It's always important to check the forecast versus the current cash flow statement. Large discrepancies that no one can back up with facts may signal missing variables in the equation.
Tip #6 - Make Consistent Predictions
Doing a cash flow forecast once may not give you a degree of accuracy that small business owners hope to achieve.
One of the best ways to improve the accuracy of cash flow forecasts is to make it a habit. Updating your forecast as often as possible with new information can drastically improve its accuracy.
Furthermore, forecasting over long periods of time helps uncover certain trends. Again, it's all data that can help improve future predictions.
Tip #7 - Account for Variable Costs
Rent and interest rates are unlikely to change from month to month. But other costs may change depending on the weather, season, and other exterior factors.
So, when calculating costs, it's critical to allow some wiggle room for the variable costs. Those are costs that may vary from month to month - staff if your business is seasonal, GST depending on the level of sales and expenses, purchases and perhaps the utilities if you're running that air conditioner.
Accuracy Comes from Good Data
It's nearly impossible to create a realistic forecast without using all the right information. This is especially true when many things can happen in the future that will be out of your control.
But, using as much data as possible can only lead to more accurate forecasts. So keep collecting the right data and use it well.