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Cash flow forecast: the starting point of problem-solving in small businesses.

By Nancy Zhang

Cashflow forecast for business

How much mark-up margin shall I charge my customers? What sales terms shall I set for my invoices? Shall I take a small business loan? What should be my sales target for the next season? These are questions that small business owners are obsessed with. 

Based on my working experience as a bookkeeper, most of those questions can be easily addressed with a cash flow forecast. 

People usually get misled by the bank account balance, thus liabilities such as trade creditors, BAS and superannuation are likely to be neglected. Monthly cash flow usually covers the incomes and expenses possibly arriving in the following twelve months, and could be further divided into weekly cash flow forecast. Hence, a cash flow forecast gives the business owner a better idea of the company’s cash position.

In addition, since most small businesses rely on internal sources of finance, it is critical to remain a healthy cash flow. When a business opportunity comes, thanks to your healthy cash flow, the possibility of missing it just because of insufficient working capital is minimized.

How to build a cash flow budget? 

Business owners are recommend to start from profit and loss report for the past 12 years, but don’t include outlier –if the business operation was suspended for a month or a week during a month, you don’t want to include it in your data. For each account, you should calculate the average.

For a start-up, Score has a really good template as a starting point for building a cash flow budget.

Income: If your business has regular or relatively steady income sources, the average is likely a reliable indicator. If your business is project-based or has a limited number of major clients, it is better to pin point the time and the amount on your cash flow budget.

Fixed cost or overhead cost: Typically, liabilities resulted from a long-term contract, such as salaries, loan repayments, rent, printing and phone bills; need to be included in monthly budgets. It is equally important to consider the seasonally or annually payments, including tax, superannuation, membership or subscription and year end auditing. 

Separating fixed cost and variable cost can also help in pricing in terms of insuring business break even and determining the production level of a business.  

Variable cost: Costs that vary with production outputs - basically refer to cost of goods sold (COGS) or cost of projects, should be allocated according to your sales targets for each period. Split COGS into sub accounts to make your estimation easier and more accurate. 

How to use the budget?

"Don’t forget that data in itself won’t drive your business forward, it’s how you apply it to make meaningful decisions.”, according to Martin Campell, a business journalist from smallbusiness.co.uk. From my experience, it is worthy spending time to reviewing and reconciling the accounts. My clients are surprised by the bills they have received when they actually sit down and look at the accounts. 

For effectively utilising the budget, I suggest having two additional columns for each month to record actual expenses and variances. Whenever there is discrepancy between actual and budgeted cash glow, try to figure out the reason and make appropriate adjustments either to the budget or to the business. It can be a call for a better supply chain – track expenses, purchase planning, or enhanced account receivable control – more prompt billing system, offer discount for early payment and penalty for late payment.

With careful planning, I believe running small business will be fun instead of being a stressful job. 

Nancy Zhang is an accountant/ bookkeeper at Tailored Accounts. Having been exposed to accounting knowledge and skills in the Australian National University, she identifies accurate bookkeeping as the key ingredient for maintaining a healthy business. In her spare time, she enjoys the arts and painting.