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Cash flow has always been king for small businesses. In fact, more small businesses fail because of cash flow problems than for any other reason.
It doesn’t have to be that way. There are many best practices that you can follow to help you manage cash flow and mitigate any problems. But to be truly useful, your forecast needs to be as accurate as possible. That’s a challenge, because any forecast involves an element of guess work. That being said, there are a number of things you can do to ensure that your cash flow forecast is as accurate and helpful as possible.
1. ANALYZE BUSINESS INDICATORS
As you prepare and maintain your cash flow forecast, you’ll need to keep an eye on your business indicators, such as your sales pipeline. Are there any big deals lining up that could have a positive effect on cash flow? Is any investment needed to make those deals happen, like marketing, product development, staff, or travel? What about your sales funnel? Is any cash outlay needed to close the opportunities at various stages of the funnel? This insight will inform your forecast for the months ahead.
2. ESTIMATE YOUR SALES BOOKINGS TIMELINE
Now that you’ve studied your pipeline, it’s time to assess when these opportunities will close and generate cash.
Forecast out on a weekly or monthly basis and build this into your cash flow forecast—remembering, of course, that a closed deal doesn’t mean cash in hand. It might take weeks, or even months, for your client to pay for your products or services. This exercise will give you some assumptions to play with.
3. WRAP YOUR ARMS AROUND YOUR BUDGET
Your cash flow forecast should account for any anticipated expenses and their payment dates. This is where your budget document can help… If it’s maintained regularly. Be sure to include all your obligations, including both fixed and variable costs, and make sure they’re up to date!
4. BE A DILIGENT COLLECTOR
Because of their light management and administrative structures, small businesses can find collections a challenge. But slow-paying or late-paying clients are a primary cause of cash flow problems. Even if business is booming and profits are high, a late-paying client can wreak havoc on your cash flow situation.
The solution? Work on being a diligent collector. Use your contract terms to help you establish some form of forecast accuracy as to when cash will hit the bank, and restate those terms on your invoice.
Another way to take the guesswork out of your cash flow forecast is to introduce some predictability into the payment process by making it easier and quicker for your clients to pay you. It could be via PayPal, credit card, electronic funds transfer, or e-payment services like Bill.com.
5. MAINTAIN YOUR FORECAST
Your cash flow forecast is a living, breathing document. Get into the habit of regularly reviewing all of the above and updating your forecast accordingly. You can also use your cash flow statement (different from your cash flow forecast) to help you review how you’re doing against your forecast. This can help you spot patterns and trends, like how quickly or slowly a certain client pays you, and ensure a more accurate forecast for the months ahead.