• Stella Jansen

How does a Cash Flow Forecast work? Is a budget necessary?


Lack of cash flow can be the difference between success and failure for small businesses – cash flow planning can reduce stress for both you and your creditors, and knowing you have money spare allows you to expand.


Accountants and bookkeepers are in an excellent position to prepare Cash Flow Forecasts due to their extensive knowledge of the operational aspects of small businesses. Accountants 360 uses Xero to ensure that your information is up to date and that cash flow reports and budgets can be generated quickly.


This blog post will explain why you should create a Cash Flow Forecast and will cover the following topics:

· The requirement for consistent cash flow

· The value of cash flow forecasting

· Budgets vs. cash flow

· Cash Flow Suggestions


Small businesses need constant cash flow

A company's cash flow is its lifeblood. All businesses must ensure that they have enough cash to pay their bills – the loss of a supplier can be disastrous for anyone. Cash is constantly required to meet payment obligations arising from a variety of sources, including:


The Australian Tax Office

Each quarter, a Superannuation Guarantee obligation arises; many of our clients pay this monthly to avoid a small cash flow hit.


Depending on your turnover, GST is due monthly or quarterly with your activity statement.

PAYG Instalments are intended to cover a company's income tax liability for the fiscal year. These amounts are due along with your activity statement.


PAYG Withheld from wages are due with the activity statement and are frequently a surprise for businesses that do not plan their cash flow. The net wages paid on each payroll are only half the battle; income tax must still be paid to the Tax Office on behalf of your employee.


Suppliers & Creditors

Supplier payments may be due in 14, 30, 60, or 90 days. A healthy relationship with these other businesses necessitates having enough cash on hand to make these payments on time. It's easy to forget that your suppliers are in the same boat as you, juggling cash flow on a monthly basis.

When Accountants 360 is in charge of the bills, we advise our clients to: Ensure that payment terms are clear and equitable. Refusing payment without first contacting your supplier is a bad idea.

On an annual basis, compare the prices and terms of your preferred suppliers to those of any competitors. Having the cash to pay your bills in advance often means you'll be able to negotiate a discount.


Employees

Paying late or incorrectly is the number one way to sever your working relationship with your employees. Payroll is a highly emotional aspect of business, and a mistake can have far-reaching consequences.

We manage payroll for several our clients to prevent this from happening, allowing business owners to relieve themselves of the stress.


How Important Is a Cash Flow Forecast?

A cash flow forecast tracks the cash that enters and exits your business over the next six months. For businesses, it can be difficult to get an accurate cash flow right the first time, and expenses frequently slip through the cracks.


It allows you to forecast cash peaks and troughs and thus determine whether you have enough cash to cover upcoming payments. Importantly, it alerts you when you may need to take action – such as discounting stock or obtaining an overdraft – to ensure that your business has enough cash to meet its needs. On the other hand, it allows you to see when you have large cash surpluses, which may allow you to negotiate bulk purchases at a discount with suppliers or purchase assets to make your business more efficient.


What is the difference between a budget and a cash flow?

It allows you to forecast cash peaks and troughs and thus determine whether you have enough cash to cover upcoming payments. Importantly, it alerts you when you may need to take action – such as discounting stock or obtaining an overdraft – to ensure that your business has enough cash to meet its needs. On the other hand, it allows you to see when you have large cash surpluses, which may allow you to negotiate bulk purchases at a discount with suppliers or purchase assets to make your business more efficient.


Tips on Cash Flow

If a customer refuses to pay or cannot pay the full amount, you should consider whether you should continue to do business with that customer to protect yourself from non-payment. Cash-on-delivery terms are another option.


Any sales invoices should be sent out right away. An “end of the month” invoice process will delay the time the customer receives your invoice, and thus the time you get paid.


Offering discounts in exchange for a full and up-front payment can tip the scales in your favour with debtors. Nobody likes having a lot of money owed to them, and having debtors serves no purpose.


Set up a deposit system in which large invoices require a small upfront payment – this can make it easier to purchase materials or pay wages for on-the-job staff.


While it may be tempting to completely stock the shelves for your busy season, carrying excess stock has a cost. If you have stock on hand, it means you don't have any cash in the bank. A good working relationship with a supplier can mean the difference between receiving stock in one week and receiving stock in three weeks.


If you are looking for cash flow guidance or thinking it’s time you made a change of accountant, please give us a call (07) 3804 7575. With over ten years of combined experience working with a diverse range of clients, Accountants 360 is well equipped to assist your business. We offer Bookkeeping and Tax Services and would love to help you succeed.

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