Do you wish you could predict how much money your company will make and spend next year so you can plan for it today?
What if I told you, you can do just that using cash flow forecasting: A process of estimating how much money with flow in and out of your company in the coming year.
This might sound like a lot of hocus-pocus, but if you do it correctly, it can be fairly accurate. It's something that could give your company an upper hand when it comes to preparing for 2015.
To get you started, we're revealing the seven cash flow forecasting steps you need to take today. But first we must warn you to avoid these mistakes so your forecasting steps aren't in vain...
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Avoid these forecasting blunders so your cash flow forecast is accurate
For our seven cash flow forecasting steps to work, you have to watch out for critical mistakes.
According to Mary Ellen Biery, a financial reporter for sageworks.com, there are two major causes for forecasting errors: Omissions and over-optimism.
Biery says there are seven types of forecasting omissions that can cause serious difficulties:
1. Year-to-year operational changes;
2. Non-expense payments;
3. Infrequent items;
6. Capital expenses; and
If you forget to include any of these items in your forecasting calculations, it could throw off your figures drastically.
Two worst results of over-optimism are:
1. Sales and payments figures that are too high; and
2. Using averages.
So before you start your forecasting process ensure you have all the relevant information and try to keep it realistic.
That way, when you use these seven steps, they will give you an accurate result.
Do your company's 2015 cash flow forecast seven simple steps
Step #1: Predict how much money you'll get in each month
Remember that sales don't necessarily mean you have money. Many businesses give credit terms to their customers. That means they have sales, and probably profits, but no physical cash.
Step #2: Predict how much money you'll pay out each month
In the same way you calculate money coming into your business from sales, calculate money leaving your business – in other words, your expenses.
Step #3: Record any other cash amounts you expect to come into your business
Record any other cash you expect to come into your business. This includes:
• Interest receivable;
• Loans you expect to raise;
• Proceeds from the sale of assets, etc.
Step #4: Record any other cash outflows
List the cash outflows that aren't part of your normal operations for each month and that you don't normally include in your budget. These include any loan repayments, asset purchases and provisional and expected assessed tax payments.
Step# 5: Know your cash balance at the beginning of the first month of your forecast
Establish your cash balances at the beginning of the first month of your forecast. This amount comes from your cash book. In the following months, the opening balance for each month is the closing balance from the one before.
Step #6: Put your cash flow forecast together
• Add together the cash coming in and out of your business (income and expenses). This will give you the actual cash your business generated.
• Add in any other cash inflows and deduct other cash outflows that you don't include in your normal income and expenses figures.
Step #7: Keep updating your cash flow forecast
Update your cash flow forecast monthly, the same way as you do your budget. Compare actual income received and expenses paid with your forecast. Make adjustments for unexpected amounts and amend your future forecast months as necessary.
Remember to base all of these predictions on information from your previous financial figures.
Follow these seven steps and you'll be able to prepare your business for anything 2015 throws at you.