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Strategy, Business, CFO - 5 min read

Every company, large or small, needs a cash flow forecast. Without plans for healthy cash flow, it can be difficult to hire, invest, allocate funds for marketing and equipment and even pay your bills on time. In fact, cash flow problems are one of the major reasons why startups fail, according to a study by CBInsights.

With a cash flow forecast, however, you can set goals for the future and ensure you have adequate resources to help you achieve them.

In this blog post, we’ll look at five common errors to avoid when it comes to cash flow forecasting. These errors can be easy to avoid if you know what to look for and are deliberate with your planning.

 

Forgetting That Timing is Everything

Timing is everything when it comes to cash flow forecasting. This is true because not everything occurs evenly over the year. For example, you may have some large one-off payments such as PAYGI, insurance, BAS and super, which require you to plan the timing of these expenses. This can also extend to Payroll processing and wanting to ensure you have the right amount of funds available at the right time. 

It’s also important to allow for longer lead times on collections around certain times of the year. For instance, payments may be slow in December and January as well as around other holiday times. Avoid the mistake of allowing yourself to be surprised by increased debtor days during these times; it happens every year, so plan for it.

 

Not Accounting for Growth Periods

Growth requires extra cash reserves, and if you haven’t planned for your growth periods, you may soon find yourself strapped for cash. 

While growth is wonderful, it can also come with its risks. In fact, the first visible sign that happens when a business is growing is that cash gets tight. When more sales come in, you need more employees to fill the orders. With more employees, you need more office space, facilities and equipment. With more inventory, you need more cash. During these exciting periods, money can seem to fly out the door faster than it comes in. 


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Before you start thinking about growing your business, consider using cash flow forecasting to map out your strategy. Iron out existing cash flow issues that can be exacerbated during growth periods, and address the ways your cash flow is affected by management, accounting, product development and labour. Also ensure your cash flow forecast accounts for indirect costs, debt payments and working capital to round out your cashflow approach.

 

Not Considering Tax Changes

While it’s safe to predict that your business needs to account for taxes, it’s not safe to assume that taxes will always be the same. Legislation brings about changes in business taxes from time to time, and you may owe more or less from tax period to tax period depending on your sales volume, the number of employees on your payroll and even superannuation changes. There can also be ancillary taxes like payroll tax or fringe benefits tax, which are always lurking around the corner and regularly unplanned for. 

Planning for  tax payments and paying your taxes on time help your business to avoid penalties and interest imposed by the ATO and any other nasty cashflow surprises. Consult your tax advisor regularly to ensure you are maximising your deductions and know what you can and can’t claim. It’s too late to fix it once the year is over.

 

Not Allowing for Late Payments

Have you ever had a month in which all of your customers paid right on time? Probably not. While it would be ideal to be able to plan for on-time payments all the time, this strategy is not realistic.

Effective cash flow forecasting takes a realistic approach. You’ll be in better financial shape when your cash flow forecasts allow for late payments. Plan for the worst and you’ll have very little surprises.  

 

Using a “Set and Forget” Approach to Cash Flow Forecasts

In this day of automation, it’s tempting to want to use a “set and forget” approach to cash flow forecasts. Many of us schedule our social media marketing posts, use tools to make recurring appointments appear on our electronic calendars automatically, and set up automatic bill pay for a variety of services. 

But while this approach works well for some tasks, it’s not always a good idea for cash flow. Your business cash flow can have too many variables to be set on autopilot, and your forecasts should be able to handle a variety of events such as promotions, hiring, capital purchases and more. 

Look at cash flow forecasts as an effective tool for helping you to take your business from where it is now to where you want it to be in the future. It can allow you to set and achieve realistic goals, making sure you have adequate resources at every step along the path.

For more information about cash flow forecasting, or to speak with one of our advisers about another business issue, reach out to us at Altus Financial. We’re here to help you achieve your goals.

 

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