Forecasting cash flow

Cash flow is of crucial importance for any owner of a small business.

The concept of cash flow seems simple enough. It is desirable to have more money coming into a business than going out. Positive cash flow allows businesses to run: to cover operating expenses, rent, salaries and the raw materials or other services that you may use as the basis for your own business and sales.

Benefits of good cash flow

A strong, positive cash flow means having enough cash for a business to invest in expansion.

Another benefit of good cash flow is the ability to apply for a loan for your small business. Lenders will need to know that you have the ability to pay the loan back. In order to make an assessment of your ability to repay a loan, lenders will want you to show that you have a healthy cash flow.

But cash flow issues are not necessarily this simple. You can make a profit and still go out of business – and indeed, many profitable businesses go out of business each year because of poor cash flow management. Business Victoria says that 80% of businesses go under because of cash flow problems.

To survive, your business should have a sufficient amount of working capital to cover your day-to-day operations (subtract your current liabilities from your current assets to get your working capital). It’s also necessary to avoid debt. If you have too much debt, it can affect your cash flow badly. It won’t matter if you are operating a business that is profitable if all of your cash is being used to pay off debt. If this is the situation, you may run out of the cash you need to run your business.

How to forecast cash flow

One way to manage cash flow is to forecast it. Business Victoria breaks down how to forecast cash flow into five steps:

  1. Prepare the income or sales for your business – this is your sales forecast.
  2. Prepare details on any other estimated cash inflows (such as GST rebates, grants or loans being paid back).
  3. Prepare the details on all estimated cash outflows and expenses.
  4. Put together all the details you’ve gathered to prepare your cash flow forecast.
  5. Review your estimated cash flow to your actual cash flow – this can highlight any differences and help you to see why your cash flow did not meet your expectations.

In essence, it is important for business owners to monitor all cash that flows in and out, and to project cash flow forward so that you can prevent any problems before they happen. And, if you can foresee that you will run out of cash at a particular time, it is advisable to take action as soon as possible.

Some options in this situation are to get your customers to prepay their invoices, to negotiate delaying payment to your suppliers, or take out a business loan to manage your cash flow and business until you can manage without the loan.

In the meantime, good cash flow management and foresight brings benefits. If you apply for a small business loan well in advance of your cash flow running out, you can negotiate better rates. If you’re interested in knowing how much you can borrow, you could try our business loan calculator. Or please contact us so we can talk about how we can meet your needs.


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