May 13, 2024

The Lifeline of Your Business

AUTHOR

Megan Plumridge

Without a good understanding of your cash flow, even a profitable business can find itself in dire straits. 

Cash flow forecasting is a term commonly used in business, but what does it mean, and why is it so crucial for business owners?

You can use two different types of cash flow forecasting to drive business activity: short-term cash flow forecasting, which is all about staying afloat in the immediate future, and long-term cash flow forecasting, which looks at the big picture. 

 

Short-term Cash Flow Forecasting: Staying Afloat

Short-term cash flow forecasting focuses on the immediate future – usually looking at the next 3-6 months or less. It helps answer critical questions like:

  • Do I have enough to pay my bills on time? Late payments hurt your credit and supplier relationships.  
  • Can I cover unexpected expenses? Emergencies happen, and being cash-ready is crucial.
  • Am I using my money wisely? Small leaks can sink a ship – track those expenses.

 

How to Manage Short-term Cash Flow:

  • Create a Detailed Forecast: List your expected income (sales, receivables) and all outgoing expenses (bills, rent, payroll, etc.) on a weekly or monthly basis.
  • Look for Ways to Speed Up Inflow: Offer incentives for early payment, tighten up on outstanding invoices, and review payment terms.
  • Negotiate with Suppliers: See if you can get extended payment terms or discounts.
  • Keep a Buffer: A cash reserve cushions you against the unpredictable.

 

Long-term Cash Flow Forecasting: Charting Your Course

Long-term cash flow forecasting is where you paint the bigger picture. It typically looks from one to five years down the road and helps you consider the following:

  • Growth Plans: Are investments in expansion or equipment financially feasible?
  • Debt Management: Can you comfortably pay off loans or secure new financing?
  • Profitability Goals: How will your sales and expenses change over time, impacting the bottom line?

 

How to Create a Long-term Cash Flow Forecast:

  • Start with Historical Data: Analyse past financials for trends and seasonality.
  • Factor in Market Growth: What’s happening in your industry? Are there opportunities or threats?
  • Be Realistic with Projections: Don’t just hope for the best; forecast conservatively and then build a plan to beat expectations.
  • Revisit Regularly: Your long-term forecasts need to adapt as your business evolves.

 

Short-term planning keeps you operational; long-term forecasting provides the insights you need to move forward strategically. Ask yourself:

  • Should I take on that big client project even if it has longer payment terms? 
  • Is this the right time to hire more staff?
  • Can I afford to launch a new product line?

 

Cash flow management isn’t the most glamorous part of running a business, but it’s one of the most critical. By understanding short- and long-term planning, you can make financial decisions that protect your business today and ensure its long-term success.

 

Tools to Help

  • Spreadsheets: You can build your own cash flow models on Excel or Google Sheets.
  • Accounting Software: Programs like Xero have built-in cash flow tools.
  • Forecasting Apps: Dedicated apps can simplify creating projections and offer ‘what-if’ scenarios. We like Fathom and Spotlight Reporting as they sync with Xero to pull your current actuals as a starting point.

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We have built bespoke models we can use to effectively develop either short-term or long-term forecasting models for your business, helping you plan and make decisions.