5 golden rules of cash flow forecasting from Pegasus
28th Aug 2014
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Cash flow is the flow of cash in and out of a business and managing that flow is vital to the success of any business, large or small. That’s where forecasting comes in; forecasting helps you predict the flow of cash in and out of your business to ensure you always have sufficient funds to pay your bills.
Forecasting needn’t be a daunting task. It can be as simple as a spreadsheet listing your monthly incomings or outgoings, or you can use financial or credit management software to help manage your cash flow and make more sophisticated financial predictions. Whatever forecasting method you use, there are a few golden rules to remember:
1. Be realistic
It’s crucial to be realistic with your forecast. Always err on the side of caution and don’t overestimate sales figures and revenue predictions. You would rather be in a position with excess cash left over, rather than not enough.
2. Don’t miss anything out
Include everything in your forecast to make it as accurate as possible. A forgotten utility bill here and there might not seem like a big deal, but missed expenses like those add up and can make a dramatic difference to your overall position.
3. Review your forecast regularly
Expenses such as electricity and water bills can change quickly and your expenses 5 months ago might not be the same as they are now. It’s important to check your forecast against your actual cash flow on a regular basis to make sure it matches as closely as possible. This way you can revise your predictions as you go along to improve accuracy.
4. Don’t forget about seasonality and quieter periods
You may experience busier and quieter periods, especially if your business is of a seasonal nature and generates most of its income in a limited number of months. Cash flow forecasting then becomes even more important because, even during your quieter periods, outgoings like rent and employee wages will still need to be paid. Look back at previous years to identify trends in demand and make sure you put cash aside for those times.
5. Don’t push yourself
If the thought of doing an annual cash flow forecast is too daunting, you could begin by doing a monthly forecast to see how close you are, followed by quarterly forecasts. If you don’t feel confident in producing an accurate annual forecast, it would be better to perform smaller forecasts on a regular basis instead. Taking the time to produce full annual forecasts that are incorrect and inaccurate will only cause you problems in the long term.
About Pegasus Software
Pegasus has been one of the UK's leading suppliers of financial, payroll and business software solutions for over 30 years. Our flagship solution is award-winning Opera 3. Opera 3 is a complete business and accounting solution that can be fully integrated throughout your organisation, eliminating the need to run separate finance, payroll, CRM or service systems.
We’ve been creating market-leading accounting software since 1981 and in that time we’ve come a long way. But Pegasus is more than a team of developers with a mission to create the best business software money can buy. We’re part of a close-knit team that includes a nationwide partner network hand-picked for their technical talent and...