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Pegasus Blog

5 golden rules of cash flow forecasting


August 28, 2014

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.

For more information about how Opera 3’s Financials and Credit Management Centre software can help manage your cash flow, contact us on 0800 919 704 .