How to forecast cash flow management problems
Cash flow is a critical factor to business success. Too little revenue coming in or too much going out will cause any organisation struggle to stay afloat.
For those who operate a small business in Australia, future proofing your cash flow is a crucial consideration. Without this forethought, it is likely that your organisation could become one of the 51 per cent of businesses that cease trading within the first four years of operations. A recent report from Dun & Bradstreet (D&B) suggests that year-on-year business closures have increased by 9.6 per cent, compared to an 8 per cent increase in total business start-ups.
To ensure your small business is one of the 49 per cent of start-ups that continue operating beyond that four year hurdle, act now to implement cash flow management forecasting strategies. Anticipating challenges before they become major problems is a simple and effective method for improving your business’s chances at long-term success.
Here are four key steps you should take to make the most of revenue forecasting:
1. Know the market
One of the most significant influencers of small business cash flow is the performance of the market as a whole. If your industry is facing significant corporate, consumer or legislative challenges, then it is reasonably assured that your business will also be affected to some degree.
You can potentially improve your ability to forecast and adapt to changing markets by keeping an eye on business sentiment surveys and financial reports such as the D&B, Roy Morgan, and NAB business expectations surveys. By monitoring the levels of optimism regarding the future of your market, you can gain valuable insights into how others are responding to challenges, their predictions on influencing future growth, and incorporate informed strategic decisions into your own planning.
2. Develop a business plan
Often cash flow management is a reflective process – with businesses responding to the revenue they receive rather than determining strategies to sustain their income. Failure to forecast can lead to serious issues when liabilities fall due, or when considering capital purchases.
A business plan should be created that reflects upon the past, present, and future to develop a strategic plan that will lead to long-term benefits. Planning and scheduling projects using a gantt chart will help you assess how long a project should take, determine the resources needed, and plan the order in which you’ll complete tasks. For example, when assessing the viability of purchasing new equipment, you may find that by reflecting upon your past performance and giving consideration to future challenges and market sentiment, it may be better to hold cash reserves to bridge possible revenue shortfalls and instead lease, outsource or otherwise delay purchase.
Automating your invoicing/receivables will certainly help streamline the cash flow process, but it can also help you analyse and predict payment trends.
By utilising cloud accounting software and electronic payment processing, you can more accurately anticipate when money will arrive in your accounts, provide your customers with convenient payment options, automate and even save time reconciling your account transactions. MYOB and Xero provide easy to use and cost-effective options for small businesses.
The small business landscape is constantly changing. With so many potential influencers, including legislative and political changes, ever emerging technologies, and variations in consumer demand your business plan can easily become outdated and lose relevance. It is critical that you regularly review your forecasts to ensure they remain accurate and applicable to your business and industry.