No matter the size of your business, it’s important to forecast and keep them all updated; as one of the key reasons that small businesses fold is that they run out of money to cover their costs. Forecasting will enable you to see when you expect cash to go out and come in, the number of sales you expect to make and whether you think you will make a profit.
It also provides you with the opportunity to pose those ‘what if’ scenarios for your company. You could try this for when you are thinking about starting a new service, or releasing a new product.
Below are a few tips to think about when managing your cash forecasts.
1) Forecast your sales based on earning date
Base your earnings on the work you will do and how much you think you will earn each month, not how much you expect your customers to pay each month. The cash flow forecast will contain all payments by customers.
2) Try to include all costs
Even though your forecasts aren’t expected to be entirely accurate, it’s best practise to try to include all of your costs no matter how small. Remember costs like depreciation, mileage travelled on business in your own car and office use.
3) Should your forecast figures include VAT?
If your company is registered for VAT, you should ensure that your profit and loss forecast and sales forecast are created without VAT that you will charge your customers and then claim back.
But if you can’t claim back VAT on such things as business entertaining, or if your are on the VAT flat rate scheme, you should include it in your day-to-day profit and loss forecast.
However in your cash flow forecast you need to include VAT, because the funds will be going both in and out of your bank account.
4) In your cash flow forecast, your dates may be different
When drawing up your profit and loss and sales forecasts you include costs when you incur them and sales when you earn them.
Yet the cash flow forecast is different. You will need to include the transactions when the money actually changes hands.
5) All money (in and out) should be included in your cash flow forecast
You cash flow forecast needs to include all comings and goings of your business bank account.
This includes all money coming in, such as money borrowed from your bank and even family members.
It will also include all money leaving your account, such as money your spend on new business equipment and taxes.