The Need for Cash Forecasting

Cash forecasting

Profit Growth

For expert help and advice on Cash Forecasting and achieving strategic profit growth, speak to Edinburgh Accountants Allsquare

It’s fair to say that everyone wants to know where they stand, and business people are no different.

In its simplest terms, cash forecasting is the process of estimating a business’s future financial position based on previous performance and experience and income and expenses you know will happen.

It’s easy to see how having an estimate of likely income and outgoings could help with business planning and development, and an accurate estimate is vital in making sure that unexpected cash-flow problems are kept to a minimum.

Cash forecasting need not be a lengthy or complex process. In addition, it is one which pays dividends if time is invested in it.

The simplest way of completing a basic cash forecast is to use a spreadsheet to detail monthly income and costs. Break your costs down into categories, which will help to identify any annual fluctuations (such as changes in your outgoings in winter because your heating bills have risen). Include annual totals for each category.

It’s better to over-estimate your costs and under-estimate your income. Miscalculations can cause surprises but a positive surprise is always more welcome than a negative one.

Cash forecasting is all about the money that goes in and out of your bank account at any given time, an unpaid invoices from a client will show when you expect it to be paid and not the date you raised the invoice and remember to include everything that you have received or paid out for in your cash forecast. Lots of small expenses can add up to a large lump sum, and overlooking just a couple of expenses a couple of times a week could add up over time and make a real difference.

One of the main benefits of cash forecasting is that it gives you and your business a framework on which to hang your ambitions. With good cash forecasting you’ll know how hard you have to work to break even, how much harder you have to work to grow your business or whether you can afford to take on employees to help to get you where you want to be.

Of course, cash forecasting is not an exact science, but it can help to take some of the stress and uncertainty out of running a business. You’ll know how your business is progressing and be able to rectify any problems that much quicker if you can see patterns in spending and income and match them up to strategies or approaches that you have used.

One way of taking some of the uncertainty out of cash forecasting is to forecast three scenarios — using what you think you’ll earn next year and then creating a second forecast 20% lower and a third 20% higher. This will help you to see how much leeway you have before you start operating at either a loss or a healthy profit.

For more help and guidance on cash forecasting, call Allsquare today on 0131 343 1510.