Why you Need a Cash-Flow Forecast in 2020

Posted 16 Dec '19

We’ve talked about the importance of having a cash-flow forecast for your business a LOT at Empire Accountants, and our reasoning is generally because it predicts the ebb and flow of cash in your business – Which sounds pretty important and straight forward right!?

BUT it wasn’t until I was perched on our office beanbag in the lunch area last week, talking to Beth about a cash-flow forecast she was preparing for a client, that I actually took the time to think WHAT DOES THAT EVEN MEAN…?

So as a well experienced NON-Accountant I asked all the questions in the most UN-Accountant way and here is my ten cents worth on why cash flows and planning are so important to small business.

1. The first benefit is knowing your true business position

Are you currently managing your business position by tracking your Profit & Loss?

As a busy business owner, we might only glance at our Profit & Loss (P&L) once in a while, just to check that hey we’re on track for our sales, our expenses are around the same amount and great news – we’re still making profit on the bottom line… wait a minute it says we are making money, so why isn’t there any money in the bank account?

While a P&L is super important to check in on for an overview of your business performance, it won’t give you a good picture of the cash movement of your business.

In other words, while you might be making profit in your business on paper, it’s the cash and how that travels through your business that keeps it ticking along, growing, or giving you the ability to make better decisions and access opportunities.

What a Profit and Loss Statement doesn’t show you…

Did you know it doesn’t include your GST obligations?

Beth explained that the purpose of a P&L is limited to showing you business profitability and performance, meaning that this report is not the right one to help you understand what you would need to keep aside to meet your GST obligations when they fall due.

So firstly, the report that will help you understand cash obligations is a cash-flow statement which reports your actual cash income and expenses at the time you paid them.

Handy right? But what if it’s too late and you’ve spent all the money?! Well, this is where the cash-flow forecast helps you predict these movements in your bank account.

2. The second benefit is to map out plans for growth in your business

Do you have plans for growth in your business in 2020?

Sitting down and having a conversation about your business plans for the year ahead, might just be the most valuable reason you need to build a cash-flow forecast.

Putting plans to paper sets motion to ideas and goals so that you can actually see what is required from you to achieve the next step in your business. Beth explained that the best part of preparing a cash-flow is sitting down and having a conversation with her client about their plans. She’ll ask things like:

– Are you currently at capacity in your service or product production?
– Are you wanting to bring on a new employee or source a contractor to assist in any area of your business?
– How are you currently marketing and selling your service or business to achieve your sales and do you intend on growing your sales? If so… Then how? Is it a website rebuild, AdWords, marketing consultant etc ?

And Beth’s favourite question that is often met with uncertainty…

– What do you want to pay yourself?… Not what do you currently pay yourself, but what do YOU want?

That’s right, a cash-flow forecast gives you the opportunity to hit your salary dreams, by accurately breaking down step by step how many ice-cream cones you need to sell to children at markets to be living the lifestyle you want.

Or you know, whatever it is you do…

3. The third benefit is all about performance indicators

Do you currently have any performance indicators in your business?

The last hot tip that Beth shared was that once a cash flow is complete it’s a great measure to keep track of your business performance and noticing areas of opportunity or shortfalls.

If you have a small team or are just a one-person-band you might feel like WHO HAS THE TIME to keep track of performance when you’re just trying to get everything done day to day! And we hear you.

However, building a cash-flow-forecast for your business not only tracks your cash but also gives the ability for you to compare your actual income and expenses with the projections.

In the process Beth will identify indicators that are easy for you to track and measure so week to week or month to month you can do a simple check to know whether you are on track for the plan you set.

Your cash-flow forecast insights can assist in changing your business strategy, improving processes or perhaps providing realisations that certain products/services don’t actually make you any cash-money.

So my friends, why should you call Beth to build you a cash-flow forecast in 2020?

1. It’s better than relying on your P&L Statement for cash position
2. It tracks your GST & PAYG Obligations
3. It helps you plan and gives you the opportunity to hit your goals for 2020
4. It informs business decisions like changing strategies, products or services

Call Empire Accountants on 07 3124 0244 and let me book you a complimentary meeting with our team to start 2020 the right way!
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Written By: Kate Herlihy, your resident Office Manager