Cash flow forecasting is important for SMEs at any stage of their business journey, especially in tough economic conditions. With Australia’s inflation rate currently sitting at 6.1 per cent, along with supply chain challenges and labour shortages, running a profitable business can be particularly challenging. No matter the size of your SME, cash flow forecasting gives you an accurate snapshot of the inflows and outflows of cash in your business, helping you see where you may be falling short and allowing you to plan ahead for expenses and investments in growth.
Importantly, cash flow forecasting doesn’t always have to analyse your current cash balance, inflows and outflows. While a current cash flow forecast (your base case) is essential to understanding your present position, creating best-case and worst-case scenarios will demonstrate how your business’s cash flow may be impacted in different situations. Keep reading to learn more about the importance of cash flow forecasting for SMEs and how to do it effectively.
Cash flow forecasting is the process that allows you to estimate the cash inflows and outflows in your business. This process helps SMEs ensure they have sufficient money to cover their expenses and plan for larger investments in the business’s growth, such as upgrading equipment and machinery. As an important tool in decision making, cash flow forecasting can not only help SMEs to manage their capital better, but it can also help in taking calculated risks to capitalise on new business trends and opportunities.
Further, strong cash flow management helps you see if and when you may run out of money, so you can plan ahead to address cash flow problems. For example, if you notice a period of tight or negative cash flow ahead, you may reduce overheads, take on more investment, or access alternative finance sources. In contrast, if your SME is performing well, a cash flow forecast allows you to model different scenarios where you may invest in growth, such as expanding to new markets, hiring more employees, or ramping up production.
A range of free online financial forecasting tools will help you create a cash flow forecast. On these platforms, you can see your projections for the next week, month, or future months ahead. It doesn’t matter which platform you use. The important factor is having all of the data available to ensure your forecast is accurate. Using the data from within your accounting software is a smart option, so you don’t miss anything. You can download this data and use it with a cash flow forecasting software platform or simply use a spreadsheet template.
Three key elements will be analysed in your cash flow forecast: the cash balance at the start of the analysis period, cash inflows, and cash outflows. Once you have all of your data collected, decide how far in advance you want to forecast. For established SMEs with strong and stable revenue, it can be quite straightforward to forecast up to a year in advance. Younger SMEs, even if they’re unsure about future inflows, should still use cash flow forecasting to understand their cash balances, map out different scenarios, and make changes to improve cash flow.
The key objective with cash flow forecasting is to know your approximate cash balance ahead of time, so you can make adjustments to keep your business running smoothly. Your cash flow forecast should be updated as soon as things change to ensure your forecast is always current. Known as your running cash flow, this will allow you to calculate whether you have positive or negative cash flow in the short term. To calculate your running cash flow, subtract your net outgoings from your net income for each week or month (depending on the intervals you are analysing). If you see consecutive weeks or months of negative cash flow, this is a sign that you may need to reduce your outgoings. Similarly, consecutive weeks or months of positive cash flow can signify that your SME may be ready for expansion and investments in growth.
Once you’ve completed your initial cash flow forecast, perhaps for the coming weeks or months, you’ll have data available to prepare different cash flow scenarios. This is known as scenario analysis. It builds on your cash flow forecast with financial modelling to help you see what impact favourable and unfavourable events could have on your SME. Three basic scenarios should provide the basis of your scenario analysis:
By completing a scenario analysis, you’re equipped with the data to see exactly how your business’s cash flow may be impacted in business as usual, positive trading conditions, and tougher trading conditions. Armed with this information, you’ll be able to better plan ahead and make changes that will keep your business operating even in an inflationary environment.
No matter the size or age of your SME, cash flow forecasting is a critical tool for helping you to understand your finances, plan ahead, and make stronger decisions. Not only can cash flow forecasting provide you with peace of mind, but it also gives you the data to map out different business scenarios, so you can identify what changes you’d make and when to keep operations running smoothly. For some SMEs, a cash flow forecast can be a vital tool in helping to secure cash flow solutions to bridge temporary gaps. And for other SMEs, mapping out your finances can help you confidently move ahead with your growth and expansion goals, whether through serving new markets, opening new locations, or hiring more people.
As Australia’s only purpose-built and fully integrated business growth platform, Moneytech partners with businesses to support them with recovery and growth. Whether your business is seeking working capital to cover your day-to-day expenses or you’re looking for funds to invest in growth opportunities, we can help. Contact us today, and one of our experts will be in touch to discuss your options.
