Cash Flow Forecast Tips
… and the 3 simple ways to make more money
I bet you’re a bit like me. You’ve heard people talk about a cash flow forecast, but it doesn’t get you excited.
Which might make this next statement a bit controversial.
It might come as a bit of a surprise.
You see, it’s finally possible for your business to dramatically increase CASH.
I.e The bank balance.
And you can do it within 6 months if you follow 3 simple steps.
1 of those steps made a member of our coaching programme more than £1 million.
And they didn’t even break a sweat.
“It was the easiest million we’ve ever made”
That was their words.
But one thing’s for sure.
They understood how to use a cash flow forecast.
And you will too.
Once you’ve read the rest of this article.
When you’ve actioned these learnings, you’ll notice a colossal difference.
And you’ll:
– Have more money in the bank. As much as £1 million.
– Know how much money will be in the bank 3 months from now.
– Be able to grow your business without money worries.
– Pay yourself more.
– Understand how you can use a cash flow forecast to make decisions.
– And much more.
So strap in. You’re going to learn the cash flow secrets from some of history’s most successful entrepreneurs.
Cash flow forecast example
Why do I need a cash flow forecast?
The success of a small business often depends on the decisions its owner makes.
And one bad decision can cost a business owner EVERYTHING.
But how do you make informed decisions when you’re not sure where your money is going?
That’s where cash flow forecasting comes in.
A cash flow forecast predicts how much money comes in and goes out. When it’s done right, it can help you make decisions that you’re confident in.
But why do you need it?
What are the real benefits?
Let’s explore some of the situations where a cash flow forecast can be a lifesaver.
Why use a cash flow forecast?
Who else wants a predictable business?
A business where it’s EASY to make decisions.
Because the answer is smacking you in the face.
Well, that’s why you might decide to use a cash flow forecast.
They help you make decisions.
It helps put a stop to hiring a member of staff because “it feels right”. A cash flow forecast can help you look at the numbers instead and see if it’s the right decision.
Cash flow forecast for small business owners
Small business owners often face tough decisions.
Whether it’s hiring new employees, or whether to invest in marketing.
Or even whether to buy new equipment.
But, making these decisions without a clear understanding of your financial situation can be a recipe for disaster.
A cash flow forecast can be invaluable.
A cash flow forecast helps you to plan ahead and anticipate cash shortages or surpluses.
And it will help you make more profit.
By forecasting your future cash inflows and outflows, you can make informed decisions. Then you can take action to avoid potential cash flow problems.
For example, if you know that you will have a cash shortage in a few months, you can take steps to address the issue.
Long before it becomes a crisis.
Getting a loan is much easier in advance than it is when you’re struggling to breathe financially.
It’s also much easier to have a challenging conversation with a staff member.
That’s if it isn’t a complete surprise to you both.
There are many situations where a cash flow forecast can be useful.
For instance, if you are considering hiring.
You might use a cash flow forecast to help you determine whether you can afford it.
You can forecast the extra salary and benefits, as well as any potential increase in revenue.
You’ll be able to see if it makes financial sense.
It would be the same if you are thinking of launching a new product line. A cash flow forecast can help you determine whether you have the cash flow to support the investment.
A cash flow forecast is essential for making informed decisions about the future. It helps when anticipating potential cash flow problems and planning ahead.
When you do those things well you can ensure that your business remains healthy.
And that way, you are always in control.
Know where the money goes when you have a cash flow forecast
What are the benefits of using a cash flow forecast?
Using a cash flow forecast can have a multitude of benefits for small business owners.
Like they did for Mark, a member of our coaching program. Mark had not been paying himself well. He was paying the smallest amount he could get away with.
Not because the business was struggling.
It was doing well.
But Mark was a frugal man.
He’d gone into business with savings to last him a year.
Throughout that year he paid himself a tiny salary. Stopping short of the tax and national insurance threshold.
Then we went through an exercise on his cash flow forecast together. It helped him understand his true cash position.
You see, Mark’s fixed costs were £25,000 per month.
And his cash position was over £400,000.
Meaning if the business stopped trading tomorrow. Let’s say they didn’t get another customer through the door, he’d be able to survive for 16 months!
That’s insane.
So I asked Mark, “What’s the worst thing you can do with large amounts of cash?”
And he said, “Leave it in the bank”.
Why?
Because of inflation and rising costs.
You’re £400,000 today, won’t get you as far in 5 years.
So you’d be much better off investing a chunk of that money so that it’s appreciating.
Rather than leaving it in the bank so that it depreciates.
When we do this exercise with business owners, we recommend that a business has between 3 and 6 months of fixed costs in cash.
3 months if you are a subscription-based business that has low risk.
6 months if you have to sell to new customers every month or you have a model that is high risk.Or you could choose a number between those 2.
The point of the exercise is to be deliberate with your cash.
Remember, Mark was frugal.
He went for the 6 months of fixed costs in cash.
Meaning his “cash position goal” was £150,000.
Then what do we do with the excess?
There’s now £250,000 left over.
Here’s our strategy.
You should split half of everything that takes you over the cash position goal.
Half goes into a separate bank account. We call it the growth account. And you can use that cash for all things growth related.
Buying more equipment to help you grow? Use the growth account.
Want to try a new marketing strategy that’s unproven? Use the growth account.
And what do you do with the other half?
That goes to the directors of the company.
So Mark spoke to his accountant about taking £125,000 (half of the £250,000 excess) out of the business.
But that’s not the best bit.
He was making £24,000 a month in profit and excess cash.
His cash position was climbing £24,000 each month.
So he transferred half of it to the growth account each month.
Then he immediately started paying himself a much more reasonable salary of £12,000 a month.
Mark wouldn’t have done any of that if he hadn’t looked at his cash position or his cash position goal.
And that all came around because of his cash flow forecast.
There’s an immediate impact on cash management when you use a cash flow forecast. But there are other benefits to using a cash flow forecast too.
First, it provides a better understanding of your cash position.
It helps you to make informed decisions about spending and investment.
Second, it can help you manage your cash. It helps you to identify areas where you may be overspending or where you can make cutbacks.
Third, a cash flow forecast can help you spot potential cash shortages. And if you use it well, you’ll spot them long before they become a problem.
Finally, a cash flow forecast can help you plan for growth and expansion. By forecasting your future cash in and out, you can spot opportunities for growth. Then you can make a growth plan. It might even show you any investment you might need in advance.
Mark James – The Cash Flow Champion
How do you use a cash flow forecast?
Creating a cash flow forecast may seem daunting at first. But it’s a simple task when you get your head around it. And there are few tools that are as important for small business owners who want to stay on top of their finances.
Here is a step-by-step guide to creating a cash flow forecast:
Forecasting sales
Begin by estimating your sales for the upcoming period. Look at past sales figures to get an idea of what you can expect. Spot the trends and use the data to decide. You want to be ACCURATE. And take into account any upcoming promotions or events that may impact sales. Be realistic and don’t overestimate your sales potential.
Forecasting cost of sales
After you’ve estimated your sales, it’s time to determine your cost of sales. The cost of sales are the things that you pay out for ONLY if you make a sale. They are the direct costs that come with producing or delivering your product or service. Such as materials, labor, and shipping.
Forecasting fixed costs
Fixed costs are expenses that don’t change, regardless of how much you sell. This includes rent, utilities, insurance, and salaries. You pay these whether you make a sale or not.
Starting with the end in mind
When creating a cash flow forecast, it’s helpful to start with the end in mind. Think about the cash balance you want to achieve and work backward to figure out how you can get there. It will help you set goals that align with your business objectives.
Reviewing and adjusting the forecast as needed
Your cash flow forecast should be a living document that’s updated and adjusted. Review your forecast each month and compare it to your actual results. When you set the forecast for the next month, you should ALWAYS look back and see how accurate you were last time. Then you can start to identify any discrepancies.
By following these steps, you can create a comprehensive cash flow forecast. Having a forecast will help you make informed decisions and stay on top of your finances. Remember, accuracy is key when it comes to forecasting. So take the time to create a detailed and realistic forecast.
How can you improve your cash flow forecast?
Creating a cash flow forecast is one thing, but making sure it’s accurate is another.
The good news is there are a few tips you can follow to help improve the accuracy of your cash flow forecast.
Avoiding optimism or pessimism
It’s one of the biggest mistakes you can make when creating a cash flow forecast. Being too optimistic or too pessimistic about your financial situation. When you go optimistic, you spend too much. When you go pessimistic you might run out of stock or find yourself understaffed. Accuracy is the name of the game.
Using historical data to inform the forecast
One of the best ways to improve the accuracy of your cash flow forecast is to use historical data. Look back at your past cash flow forecasts of the past to see how far out you were. Then look at your profit and loss from previous months. You can use that information to inform your future forecast. It can help you identify patterns and trends. And that is what you want to be looking at to make more accurate predictions about your cash flow.
Use trends to get it as accurate as possible
It’s a great idea to use your previous forecast and the profit and loss to spot trends. But you should also take into consideration other trends. Things like the economic trend or even trends in your industry. There might be global events that will affect your sales or even the time of year.
Gather all the data mentioned above and use it for your forecast. That way, you’re taking a much more considered approach.
Use a budget tracker
Once you’ve created your forecast, you need to stick to it.
A budget tracker is a tool that helps you keep track of your spending and stick to your budget. It’s like a digital assistant that monitors your financial activity and helps you make smart decisions with your money.
If it looks like you’re going to overspend in one area of the business, you can see where you might be able to underspend somewhere else.
It’s kind of like having a personal finance coach that’s always by your side. Like a coach, it’s always there to hold you accountable. And the best part is, it’s usually free (you could even use Excel) or very affordable, so you don’t have to break the bank to keep track of your finances.
What’s the key to effective cash flow forecasting?
The key to effective cash flow forecasting is accuracy and diligence. Inaccurate forecasting can lead to poor decision-making. It can also lead to missed opportunities and even business failure.
We see business owners mess up with finance when they forecast in a rush.
Or when they don’t put any effort in.
And we see them make the biggest mistakes when they GUESS at their figures.
Rather than use data or trends.
But if you follow the steps in this article, you can get a better understanding of your cash position.
That’s only going to help improve your cash management and identify potential cash shortages.
When you have a strong cash flow forecast you can plan for growth and expansion.
Remember to avoid being optimistic or pessimistic in your forecasts.
Use historical data to help with your predictions.
And above all else, start paying attention to your numbers.
Once you’ve created a great forecast, there’s only one thing left to do.
Set up a budget tracker and track against it each week.
Then you can see where you are overspending and where you have a bit of breathing space.
Sticking to a tracker might just be the most powerful tool to help you make a good profit.
Summary
No more flying blind with your finances.
Or making decisions based on a hunch without knowing how they’ll impact your finances.
Picture this.
You’ve got a friend that’s a small business owner who’s been struggling to keep up with the financial side of things.
They’re unsure if they can afford to hire that new employee or invest in a new piece of equipment.
They feel like they’re guessing and hoping for the best.
But not you.
Because now you know exactly what you need to do to improve the bank balance and get clear on your numbers.
And if you’re anything like Mark, you might just be giving yourself a huge pay rise in the not-too-distant future.
As long as you:
– Complete a monthly cash flow forecast
– Be accurate rather than optimistic or pessimistic
– Review the trends of your business and the economy
– And stick to the budget that you’ve set
If you can complete those 4 simple steps, you’ll have a much stronger cash position, you’ll sleep at night, and pay yourself more.
Have you ever used a cash flow forecast before? If you have, what did you find most useful?
