What is cashflow forecasting and why does my bookkeeper keep nagging me about it?

If there were ever two words to strike uncertainty and confusion in the mind of any small business owner: they’d be ‘cashflow forecasting’. What the heck does it even mean, and why does my bookkeeper keep harping on about it?

There’s a key thing to remember about cash flow, and that’s that it’s different from profit. So, while you might not appear profitable on paper, you can still have a healthy whack of money in the bank. Likewise (and more commonly), whilst there may be no money in the bank, you can still appear profitable when it comes to the actual cash flow coming in. 

The reasons for this can be varied, because profit and loss is situational. Think surplus income from say, a one-off tax refund or JobKeeper payment, or loss from an expense like a big bill that can’t be delayed any longer). 

Even still, cashflow forecasting is simply a learned strategy to gain more foresight and security right now, so you can make more informed and meaningful choices for the future – no matter what’s happening in your business. Here are our best tips on how to start.

A bookkeeper explains: Projected cash flow statements

Creating projected cash flow statements can be a useful exercise to get into the habit of, in order to start creating a clearer picture of whether there’ll be enough income to cover things in future. 

Not only does this prevent cash shortages and avoid debt, but also helps you keep an eye on important sales trends. You can even start to create realistic ‘what if’ scenarios to see how prepared you’d be for certain things, like a drop in sales or a short hiatus due to illness or injury. 

Like us here at Dollars and Sense, most bookkeepers would agree that there is a certain level of flexibility that’s totally acceptable to have in any business. Basically, while you don’t need to have stacks of cash, it’s a good idea to try and keep liquid as much as you can, when you can.

The ‘tipping point’ is a concept where your operating costs and your direct costs (like paying wages) can maintain themselves so that your cashflow forecasting is crystal clear. 

It will differ for every business, of course, but as an example, an average inner-city breakfast cafe might find that $28,000 in gross income is a very good spot to maintain, because they’re still taking in $5,000 net profit while other costs take care of themselves. 

However, when that same cafe moves up into the next bracket – $35,000 – they might now have to roster an extra worker on and increase costs on their staple dishes. So their cash flow situation looks different: they’re now netting only $3,000 in profit per week, despite making more overall. 

Understanding your own tipping point means that you can work to a scenario where you have a level of comfortability on what’s routinely happening – and still take home a healthy amount despite any ebbs and flows. You can create projected cash flow statements weekly, monthly, or even further out to get to this understanding, and ideally include the following in table form:

• All receivables – Including inflows from in-store or online sales, accounts receivable, or other assets you have, like full inventory value or owned property or equipment. 
• All outgoings – Including outflows like accounts payable, super and payroll, loan payments and interest, and any other liabilities like tax.

You want to start with an opening cash balance each time, so you know what you’re working from.

Our top 10 ways to improve cashflow forecasting

While having a regular projected cash flow statement on-the-go can be helpful, it’s even more valuable to free up and find more cash in the first place. Obviously, we all want to make more money from what we do, but this is a long game, and you may not be in a position to take costs down on your profit or service anymore. So, instead, consider these game-changers in improving your cashflow forecasting. 

• Borrow over buying – Where possible, consider leasing equipment or vehicles. This means you can save yourself on the upfront cost of something, and instead finance it over a period of time. The extra benefit of this? In some cases, interest charged on that loan – or a portion of the interest – can be claimed as a tax deduction.
• Make improvements to your inventory – Work to replace low-performing stock by monitoring inventory levels consistently. You can also consider bundling slow-moving stock for a quick cash injection, or alternatively seek suppliers who only provide stock when you need it, and not in minimum order quantities.
• Pay big bills in instalments – While it might feel like less of an admin headache to pay something when it’s due, from a cash flow perspective it’s always better to stage things out – especially when there are other expenses or payroll due before the due date of a bill. Being strategic with your cash flow by building up reserves first is always a smart move.
• Take payments electronically – Cash isn’t king when it comes to cashflow forecasting, because it’s often an instant transfer to your bank account. Who wants to wait for 28 days for a payment from a cash invoice when it can be instant with faster digital payment terms?
• Offer an early payment discount if you can – Again, if you have suppliers or customers who consistently pay late, consider offering a small discount for fast upfront payment. The faster money is in your pocket, the better it is for your overall finances.
• Approach suppliers with numbers – If you have peers and colleagues in a similar industry, consider forming a co-op to approach suppliers in order to bring down the price on stock.
• Implement flexible work arrangements – Plan your rostering around peak times so that you’re not paying for headcount when you don’t need all of the staff on. You can also think of things that reward any staff behaviour that improves cash flow, like reaching sales targets and reducing expenditure (and keep staff happy with digitising payroll).
• Sell anything you don’t need – Not only does this reduce space, but potentially insurance premiums on inventory or equipment you don’t use. Remember, cull to be kind.
• Utilise high-interest accounts – Have access to a healthy opening cash balance? Keep your cash squirrelled away in a high-interest savings account to grow it, with agreements that you can access the money with minimal penalties if needed.
• Offer time-sensitive deals and sales – Encourage buyers to feel the urgency push when extra cash flow would be helpful, or during times when you know you’re going to have a quiet quarter or month based on previous intel.  Remember, Xero Analytics can help with this with their short-term cash flow tool, so speak to us about this if you’d like some expert advice on setting it up. Try and be conscious of only creating promotions at times when more cash flowing in would be especially helpful – it can be a wasted exercise otherwise.