How to plan your cash flow for the next year in 4 easy stages

 How to plan your cash flow for the next year in 4 easy stages

You may estimate your cash flow requirements with the use of financial predictions.

You have ambitious plans for your business this year, including an expansion and a significant equipment acquisition.

What impact will your plans have on cash flow? How much finance, if any, would you require?

These are typical inquiries made throughout the yearly financial planning process of your business.

A lot of individuals disregard financial forecasts

Nonetheless, a startlingly high percentage of business owners neglect to estimate their company's finances. And it may lead to major, unforeseen problems.

An essential strategy for maintaining the health of your company and a route toward sustainable development is the annual preparation of cash flow and other financial predictions.

"The goal is to have a guide that you can review all year long and adjust as needed," explains BDC senior adviser for finance products Nigel Robertson. "You're essentially leaving everything up to chance without it."

How to forecast finances

To create and use financial predictions to direct your firm, follow these five steps.

1. Make the year's budget

First, consider the goals you have for the next year. This need to be predicated on your company's strategic strategy.

You'll know exactly what you want to do when you sit down to establish your budget. There are many steps involved:

Calculate Your Revenue

Determine every possible income stream, such as fees, investments, and sales. Then, project your anticipated income and outlays for that time frame using past data and predictions about future developments.

To make sure that your company has adequate cash on hand for the whole business year, remember your credit policy and when your customers pay.

Calculate the annual costs.

Calculate your yearly spending and include in the extra money you'll need to launch your company plan. You should tack on these expenditures to the costs of operating your day-to-day company, like:

salary

Utility and rent

interest-bearing debt payback

Don't forget to account for planned large-ticket purchases like upgrading your computer, purchasing a new vehicle, or rebuilding your website.

make an estimate

Make your predicted financial statements for the year using estimated income and costs. These need to consist of:

an estimate of revenues, expenditures, expenses, taxes, and other items on a projected income (profit-loss) statement.

An anticipated balance sheet including equity, liabilities, and assets

Monthly cash flow forecasts include investments, loans, accounts payable, and receivable.

To properly assess the effect of each, it is useful to have a variety of hypothetical scenarios (optimistic, perhaps, and pessimistic).

Although most accounting software will assist you in creating your predictions, you may also construct them manually by using the free financial statement template provided by BDC.

2. Make financial arrangements

You may use your estimates to identify the funding requirements for the next year, which you can then discuss with your bankers and other financial partners.

It is advisable to set up any company loans or credit lines that are required at the start of the year. Planning beforehand for your finance helps guarantee the best conditions and improves your chances of acceptance.

"If you come to your banker and tell him you need a $2 million loan next week, he probably won't be able to help you," Robertson adds. Surprises are disliked by bankers. When you can demonstrate that you know what you're doing, they will lend you money."

Additionally, avoid the usual error of using your working capital for long-term capital projects, since this might put you in a tight position financially. For these kinds of initiatives, long-term finance is preferable.

3. Observe and Modify

Lastly, be sure to schedule a monthly meeting with your management team to compare your forecasts to the actual figures and determine if you're on track. Variations might be a sign of problems in your company. Examine every quarter in even more detail. Make any required changes to your strategy or operational procedures.

Some Advice to Boost Your Cash Flow

You could discover that you need to accelerate your cash flow cycle or have more cash on hand when you create your predictions and go over your actual statistics. To reach these objectives, think about these suggestions.

Examine and modify projections and budgets.

Entrepreneurs must to periodically assess their forecast and budget, making any required adjustments in light of changing market conditions.

Make use of a cash flow schedule.

A 13-week rolling cash flow projection is an easy-to-use and practical tool for extending the life of your cash. A three-month window that you update every week will allow you to see your cash flow far more clearly than a monthly budget that accounts for it.

sell the stock

Outdated merchandise is taking up space in many firms. Even if there is a loss, take a look at what is not sold and trash it.

shed goods

Product lines that don't sell well could be discontinued. Quicker inventory turnover might result in greater profit for you and less interest paid on your credit line.

sell a house

Do you have any extra machinery, equipment, or other assets that you might sell to make some money? Additionally, you may make floor space on your property available for rental to another business.

terminate a noncompliant client

Take into consideration letting go of your most problematic clients—those who often complain, make late payments, or send items back. They divert your best customers' focus and resources.

Consult your bankers.

Consider calling your bankers to temporarily suspend principal payments if you are facing a cash flow problem.

Consider these suggestions as well for increasing your company's cash flow.

Think about Pay Variability and Reduced Hours

Connect part of your workers' pay to the real success of your company. If money is tight, you may want to temporarily cut down on staff hours.

Talk about a new lease.

Request a new lease negotiation with your landlord. Alternately, propose to pay less now and make up the difference in future months.

raise the amount paid

If your suppliers grant you an extension to pay, offer to pay them a little bit extra—say, 1% more.

4. Seek assistance

To create your financial estimates based on your internal resources and track your success throughout the year, think about getting outside assistance.