28 September 2023

What is a cashflow forecast and how can bookkeeping help?

A cashflow forecast is a financial planning tool businesses and individuals use to project their likely inflows and outflows of cash over a specific period, typically ranging from a few weeks to a year or more in the future. The primary purpose of a cashflow forecast is to predict how much money will be available at any given time and to ensure that there is enough cash on hand to cover expenses and financial obligations.

Cashflow forecasts are quite often requested by banks and other funding providers if a business is looking to secure a loan or grant.

Cashflow is the lifeblood of any business, regardless of its size or industry. Properly managing the flow of inbound and outbound cash is crucial for a business's long-term sustainability and success. Combining efficient bookkeeping and using a 13-week cashflow forecast can be a game-changer for businesses of all sizes.

In this blog, we look at these elements one by one.

Understanding cashflow

Cashflow refers to the movement of money into and out of a business over a specific period. It includes all the cash received from sales and other sources, as well as all the cash expenditures, such as operating expenses, loan repayments, and purchases of assets. Cashflow management ensures a business has sufficient cash or easily accessible funds to meet its financial obligations while pursuing growth opportunities.

The importance of cashflow management

Cashflow management is the practice of monitoring, analysing, and optimising the inflow and outflow of cash within a business. Here's why it's so important:

Business survival

Effective cashflow management is vital for the survival of a business. Many profitable companies have failed due to poor cashflow management, as they could not cover their short-term expenses despite long-term profitability. Without proper cashflow, a business may be forced to take out expensive loans and, in the worst cases, may be forced to shut down.

Decision making

Managing cashflow provides valuable insights for decision-making. It helps business owners understand when to invest in expansion, hire new employees, or make large purchases. It also allows them to identify periods of surplus cash that can be used to reduce debt or invest in income-generating opportunities.

Creditworthiness

A positive cashflow history can enhance a business's creditworthiness. Lenders and investors often assess a company's cashflow to confirm its ability to meet its financial obligations. A strong cashflow record can lead to more favourable loan terms and increased access to capital.

Stress reduction

Proper cashflow management reduces financial (and personal) stress. Knowing you have enough cash to pay your bills and run the payroll for your employees on time allows you to focus on growing your business rather than constantly worrying about finances.

How bookkeeping aids cashflow management

Bookkeeping plays a crucial role in managing cashflow effectively. Systematically recording all your financial transactions will give you a better understanding of your business. It also helps you track your business expenses, making it easier to see where to cut costs or allocate resources more efficiently. This is essential for maintaining a positive cashflow.

Furthermore, by regularly reviewing your financial statements, bookkeeping can serve as an early warning system. It can help you identify cashflow issues sooner rather than later, giving you time to take corrective action.

Proper bookkeeping also ensures that you accurately report your income and expenses, reducing the risk of tax penalties. This also helps manage your cashflow by allowing you to plan for tax payments.

If managing the bookkeeping aspects of your business is difficult, you may want to consider outsourcing this role to a local bookkeeper, such as JRMA.

Using historical trends in cashflow forecasting

Historical trends are pivotal in creating an accurate and reliable 13-week cashflow forecast. Many accountants use a 13-week forecast as it is a short enough timeframe to be accurate based on historical data collected over several months or years.

Such historical data can provide data-driven insights that can help you to make informed assumptions and help you to identify trends, seasonality, and potential areas for improvement. As a result, you can anticipate cashflow challenges and opportunities well in advance. 

The power of the 13-week cashflow forecast

A 13-week cashflow forecast takes your historical data and projects your business's cash position for the next 13 weeks. We use a 13-week period so that the cashflow forecast would include at least one VAT payment for VAT registered businesses.

Here are more of the benefits of a 13-week cashflow forecast.:

Short-Term Planning

A 13-week view of your business is ideal for short-term planning. It helps you focus on the immediate cash needs while allowing enough flexibility to adapt to changing circumstances.

Visibility

The forecast provides clear visibility into your financial future, allowing you to see when and where cash shortfalls or surpluses are expected.

Scenario Analysis 

You can create multiple scenarios within the forecast using historical trends and assumptions. This helps you evaluate the impact of different decisions on your cashflow.

Proactive Management

Armed with the forecast, you can proactively manage cashflow by taking steps to avoid potential issues or capitalise on opportunities.

Conclusion

Cashflow management is a fundamental aspect of running a successful business. Without a healthy cashflow, even the most promising ventures can falter. Bookkeeping is indispensable, providing accurate financial records, expense tracking, budgeting, and early warning systems.

The 13-week cashflow forecast is a powerful tool that offers insights, foresight, and the ability to make data-driven decisions to make all the difference in your business's success. Managing cashflow is not just about the numbers; it's about securing the future of your business.

How can JRMA help?

We are frequently asked by businesses in and around Droitwich and Bromsgrove to help them set up a cashflow forecast. We can also train the business owners or their staff on how to update the spreadsheet and show them how to manage their cashflow.

Keeping on top of the bookkeeping and cashflow is essential, but we appreciate that it's not always a priority for busy business owners. At JRMA, we handle the bookkeeping elements for many of our clients, ensuring their financial data is processed accurately and on time. Click the link for more details about our bookkeeping service or contact us on 01905 796512 or email info@jrma.co.uk

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