Money Doesn’t Grow On Trees

As a business owner, you will need to ensure positive cash flow to sustain and grow the business after the initial investment. Carrying out a cash flow forecast is vital for finding out if there is a need to increase working capital to ensure the sustainability of the business. Regardless of whether your business is new or already established, using cash flow forecasts to plan your spending and assess potential cash flow risks can be equally crucial.

Cash flow forecasts

Cash flow forecasting allows you to anticipate cash-balance peaks and valleys. This can help ascertain how much and when to borrow from a bank, and how much available cash you might have at any given time. Many banks ask for cash flow forecasts before approving a loan. Using cash flow forecast, you can see the sources and amounts of cash flowing into your business, as well as the characteristics of cash outflows.

Business owners normally prepare the forecast for a year or quarter, which can be divided into weeks or months. The forecast should take into account:

1. Bank balance at the start of the period
2. Bank balance at the end of the period
3. Receipts or cash inflows
4. Payments or cash outflows
5. Excess of receipts over payments – with deficits shown in brackets

If you separate cash flow for business operations from funding cash flow, you can get a clearer picture of your business’s actual performance. This allows you to find out how self-sufficient the day-to-day operations are. For established businesses, it is wise to base your revenue forecast on the same period 12 months earlier. You can also use accounting software to prepare cash flow forecasts, which allows you to update your projections in line with changes in your business or market trends.

As a business owner, you might want to consider taking Digital SME (DSME) loans to improve your cash flow. For more information on DSME loans, please click here.