After putting in the effort to create a cash flow forecast, let’s make the most of it. What insights can we gain from the forecast? What decisions can we make? What opportunities can we seize?

Bank balances

Your forecast should show your bank balance at the end of each month. Let’s take a closer look:

• Can you anticipate any months where you might need a loan or overdraft? It’s best to arrange it now to avoid costly bank fees later on.
• Will there be any months with extra cash? Consider paying down loans without early-repayment penalties or setting money aside for income tax, GST, and PAYE.
• Are you projecting a cash surplus at the end of the year? Think about upgrading your assets.

Overdrafts and loans

If you show your bank a reliable forecast, you might actually increase your credit limit or find it easier to obtain a loan. That’s because banks like to see that businesses can afford the interest and principal repayments. Even better, if you can show your bank the comparison between your forecasted numbers and actual figures, you’ll provide them with reassurance that you’re on top of your game and that your future expectations are realistic.

What if…?

Try playing around with the figures in your forecast (but make sure you always have a copy to fall back on!) and see what happens when you adjust timing and amounts. For example:

• Instead of spending time chasing customers, could you use an invoice factoring service? Note that it’s not the same as a debt collection service. You may end up seeing more invoices being paid. What percentage would you pay the collection agency?
• Would changing your payment terms help you bring money in more quickly? 
• Could you charge interest or penalties for late payment or ask customers to pay a deposit in advance?
• Are you paying your suppliers early, on time, or late? Paying them later (but still on time) may help your cash flow. If there’s a discount for paying early, take advantage of it! And if you’re being charged penalties and interest for late payments, make sure you pay on time!
• If you’re selling more than one product or service, have you considered which has the better margins? Think about reducing or eliminating the not-so-profitable revenue sources and see what impact that has on your resources and more profitable items. You could even consider increasing your prices, which might decrease your customer base but could ultimately lead to higher overall revenue.
• See the results for best and worst-case scenarios.

The future

What are your plans going forward?

• If you’d like to add an employee to give yourself more time with the family, or focus on specific parts of your business, use your forecast to include the estimated wages of this additional person. Do the benefits (in revenue or your time) outweigh the cost?
• Following on from the above, how about outsourcing functions for those niggly jobs? A good example is paying a bookkeeper or accountant to look after Xero and calculate your GST. You may take three hours a week on these activities, but it may take an experienced professional only an hour. You’re not paying for 3 hours, just the one!
• You may be planning to purchase a new fixed asset.
  • How much will it cost, and when is the best time to buy it?
  • Can you sell an existing asset or use it as a trade-in?
  • Would it be best to pay for it upfront, or borrow and make regular monthly payments?
  • Would leasing be a better option than purchasing?

Compare

Xero (and other software providers) makes it easy to see your actual cash inflows and outflows each month. Compare your forecast against actual figures.

• Were you too optimistic or pessimistic?
• What caused large variances?

Update

Remember that you can always revise the forecast. The numbers aren’t fixed, the assumptions aren’t permanent. You’ll find yourself continually updating the forecast – in time, your forecast will more closely reflect actual cash movements.

Need a hand?

From preparing a forecast in Excel, to complex modelling using specialised software, we’re here to guide you. We’ll also help you interpret the results, put forward some suggested changes, and even make you accountable for agreed actions (if you want!). We want you to have the best insights to implement positive changes to your business – so give us a call or email to see how we can work together to meet your goals!