A business can be profitable and still experience cash-flow problems. Cash flow forecasting helps small business owners understand when money is expected to come in, when expenses are due and whether enough cash will be available to meet upcoming commitments.
The Australian Taxation Office recommends using a cash flow budget or projection to identify potential cash shortages, plan for major expenses and prepare for tax payments.
What Is a Cash Flow Forecast?
A cash flow forecast is an estimate of your business’s expected cash receipts and payments over a future period.
Unlike a profit calculation, which looks at income and expenses for accounting purposes, a cash flow forecast focuses on when money actually enters and leaves your business.
For example, you may issue an invoice in September but not receive payment until October. Your business may therefore show income while still needing enough cash to cover wages, suppliers and other expenses before the customer pays.
What Should a Small Business Include?
A useful cash flow forecast can include:
- Expected customer payments
- Regular business expenses
- Wages and payroll
- Rent, utilities and insurance
- Loan repayments
- GST and other tax obligations
- Superannuation commitments
- Planned equipment or business purchases
Reviewing these items regularly can help you identify periods where your available cash may become tight.
Why Is Cash Flow Forecasting Important?
Cash flow forecasting can help business owners make decisions before a problem develops.
It can highlight upcoming large expenses, periods of lower customer payments and the amount of cash that may be available for business activities. The ATO’s Cash Flow Kit is designed to help small businesses assess their cash position and financial commitments.
A forecast can also be useful when considering whether the business can afford new equipment, additional staff or other planned expenditure.
How Often Should You Review Your Forecast?
There is no single forecasting period that suits every business. Some businesses may benefit from a weekly view, while others may use monthly projections.
The important point is to update your forecast when circumstances change. New contracts, delayed customer payments, unexpected expenses or changes in payroll can all affect your expected cash position.
Accurate bookkeeping makes this process easier because current financial information provides a better starting point for forecasting.
How Can an Accountant Help?
A qualified accountant can help a business understand its financial information and use it for forward planning. Financial statements, bookkeeping and cash-flow reviews can provide useful information for making business decisions.
D & B Accountants provides bookkeeping and payroll services as well as broader accounting support for Australian businesses.
Final Takeaway
Cash flow forecasting is not only about dealing with financial problems. It is a practical planning tool that can help small businesses understand upcoming commitments and make more informed decisions.
Regularly reviewing expected income, expenses and available cash can give business owners a clearer picture of what lies ahead.