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This is integral to business planning and the more accurate your forecasts are the better you know your business.

There are many different forecasts you can create for your business but here we are going to focus on the 3 key forecasts your business needs to succeed and how to start creating each of them.

Sales forecast

A sales forecast is an approximation of the monthly sales expectations of your business. This is usually drawn up once a year and helps you to set targets and keep your business on track for success. This is one of the most important forecasts your business can create as it helps you manage production, staffing, finance and cash flow. It is important to note that a sales forecast is only useful for your business if it is realistic.

The easiest way to start creating your sales forecast is to look at last year’s sales, this will give you a good starting off point. The next step is to add in your assumptions for this year. How many customers do you hope to add? What do you expect your average sales price to be? Are there any changes in the market you need to be aware of? By asking yourself these questions and answering them honestly instead of optimistically you can start to craft a solid sales plan that should be reflective of what’s to come.

Cash flow forecast

A cash flow forecast is a crucial component of planning for the future of your business. It takes all of your known cash inflows and outflows in a given time period and couples them with your expected income and expenses to create a picture of how your businesses finances will look in the coming weeks, months and years.

Your cash flow forecast is an indicator of the financial health of your business and will alert you to any cash shortages or surpluses well in advance, giving you time to seek finance to bridge your cash gap or reinvest excess cash into your business for growth. You can also use your forecast to measure the effects of different decisions on your business’s cash flow through scenario planning.

There are 2 ways to create your cash flow forecast. The first of which is the indirect method, which involves using the figures from your P&L and balance sheet to derive your forecast. This is most accurate for long term planning but can be unreliable in the short term. The second way of generating a cash flow forecast is the direct method which takes all known cash inflows and outflows (and their timings) and uses them to build a forecast based on actuals, which is highly accurate in the short to medium term. This method can take hours to do manually every month due to the sheer number of transactions that need to be tallied – that’s why we built Float. Float connects to your accounting software to automatically read all of your bills and invoices (both paid and unpaid) to give you a powerful forecast at the click of a button.

Balance sheet forecast

A balance sheet forecast is an important document that lays out account balances for assets, liabilities and equity in a specified period of time (usually the end of the accounting year). Businesses use this forecast to measure working capital and assess the need for additional financing. Bank managers use this to determine a business’s likelihood to pay back a loan and trade suppliers can use this document to help decide if credit is given.

The balance sheet forecast is also referred to as the statement of financial position. To create your forecast you should start by consulting your sales forecast as your projections of other balance sheet items such as inventory, accounts receivable and accounts payable will be highly dependent on sales. From this you can then start to add in projected asset, liability and equity items, after these have been added you should include in any financing you expect to receive.

There we have it, by producing these 3 vital forecasts you can measure success, anticipate and give yourself time to prepare for any changes and plan for business growth. The most important thing to remember when creating business forecasts is to be realistic, as the more honest you are with yourself the more accurate and useful your forecasts will be.

Whatever your reason, we’ve got you covered. Sue Hirst, director of CFO On Call, gives us her 9 expert tips you can use to improve your business’s cash flow.

How to increase your cash in-flows

1. Increase revenue from sales

Review your marketing methods to increase leads or customers. Take your website, for instance. Is it getting enough traffic? Does it have engagement methods, such as landing pages and offers?

Review your sales methods to increase the conversion of leads to customers. Do you have a sales process in place or is it a bit ‘ad hoc’?

Review your pricing to increase the average sale amount. Analyse your best-selling products and services which will have the most room for a small price increase. Even a small percentage increase goes straight onto your bottom line! That is, a small price increase is different from selling more stuff or services as there aren’t any extra costs associated.

2. Increase ‘other’ cash in methods

Business loans: explore the various different providers of loans, not just your own bank. To do this you’ll need to present your business as an attractive proposition to a lender. This means providing them with accurate financial information that tells a story of a healthy business with good prospects to grow.

Issue shares: look into how you can bring in new shareholders. You will need to consult with an accountant to ensure you do it the right way and that it complies with corporate rules.

Sell some assets: review your assets and decide if some are obsolete and if funds from selling them off can be better used elsewhere.

3. Get paid faster

Review your customer payment process starting with ‘terms of trade’, invoicing, methods of payment, statements, follow-up calls, payment arrangement, and debt collection procedure. By looking at each step of this process, you can determine what’s working and what needs improvement. If you’re a Xero user, consider using Chaser to automate the task of chasing clients to pay their invoices.

4. Speed up project times

Use an application to manage jobs and avoid holdups. There are thousands of systems available online today that can save you lots of time and help you to work out profitability on jobs, as well as accuracy of quoting/budgets.

5. Sell off slow-moving or obsolete stock

Do a stocktake and review your stock management system to see which inventory is slow moving. Whilst it may feel difficult to sell obsolete stock at a lower price, the resulting funds can be much better utilised buying new items that will provide profit and cash flow, rather than sitting around collecting dust on the shelf!

How to tighten up your out-flows

6. Reduce expenses

Review every line of your Profit & Loss Report and ask yourself:

• Why are we spending this money?
• Can we achieve this outcome more efficiently and cost effectively?
• Should we stop spending this money?
• Can we get a better deal from this or another supplier?

7. Slow up payment to suppliers

We’re not suggesting here that you ruthlessly use suppliers as a bank, however we often see credit terms not being utilised and suppliers paid too quickly. This is a big waste of available cash for your business.

If you’ve been dealing with a supplier for a while, it might be a good opportunity to review the arrangement and see if you can get a better deal. Be armed with good information about what business you’ve done with them to support your request.

Also set up a competitive environment with suppliers, if you have more than one option. It may seem a bit heartless, but at the end of the day you’re here to make a profit.

8. Arrange to pay off tax debts

Some tax authorities will work with you to pay off tax debts over an arranged timeframe. Don’t automatically assume you have to pay off the whole amount at once. If you don’t ask you’ll never know.

9. Delay payments to shareholders

It’s tempting when you see the business making a profit, however if you pay dividends too quickly it could put a strain on your cashflow. Before making this decision you should create a detailed cash flow forecast, to ensure it won’t cause cash flow issues in the future.

That’s where we come in. Float can help you create powerful, actionable cash flow forecasts that update automatically from your accounting software, saving you time and giving you the confidence to make the right decisions.

Start your 30 day free trial now.

Sue Hirst is the director of CFO On Call and author of the e-book ‘The 7 Key Numbers That Drive Profit and Cash Flow’.

1. Accounting software

With accessibility of cloud-based systems like Xero that are linked to bank accounts, it’s easier than ever to keep track of all your financial transactions.

You need to keep track of transactions for the tax office, lenders, but most importantly for yourself, as a business owner. A reliable and well set up system will provide you with information to ensure:

• You pay everyone the right amounts, including staff, suppliers, business owners, lenders, tax office etc.
• You know where you are making and losing money e.g. which products/services are most/least profitable, where you are going over/under budget on expenses, when costs are rising and margins being squeezed and it’s time to review pricing.
• You get paid by your customers on time, by reporting who owes what and for how long. You can also send out statements/reminders easily to slow payers.

2. A Budget

This is without a doubt the most important tool in any business. If you go ahead and get on with business without a budget you are flying blind!

A budget is your financial roadmap that keeps you on track every month. It sets out how much you plan to sell, what your sales will cost and what will be your expenses and profit at the end.

Once you’ve developed a budget it needs to be entered into your accounting system, so that you can report monthly on actual versus budget. Better still if you use Float it links dynamically to your accounting system saving you lots of time and hassle. By doing this monthly you can see where things are on/off track and fix them quickly to avoid further unnecessary losses.

Check out this blog to understand the difference between a budget and a forecast.

3. A Cash Flow Forecast

If a budget is the most important tool, a cash flow forecast is definitely the next.

Achieving your sales and profit target is great, however if you don’t handle the cash side properly your business is at risk of failure due to lack of cash.

A cashflow forecast sets out in black and white when you expect the cash to come in and go out of your business. By forecasting, you are pre-armed with knowledge that you can act upon.

For example, if things don’t go exactly according to plan and cash looks tight for the future, there are several paths you can take to free up cash:

1. Ramp up your sales efforts
2. Inject cash into the business from loans, shareholders, or sale of assets
3. Speed up payments from customers
4. Speed up finishing jobs so they can be invoiced
5. Or sell off slow-moving or obsolete stock

On the outgoings side you can:

1. Reduce expenses
2. Slow up payment to suppliers
3. Arrange to pay off tax debts
4. Delay payments to shareholders

4. Monthly Financial Management Checklist

The easiest way to ensure your financial management stays on track is to follow a simple checklist. This could include:

• Monthly reports such as profit and loss report, balance sheet and a Cashflow Forecast
• Outstanding customer amounts
• Outstanding supplier amounts
• Job management
• Stock management
• Detailed sales report by customer, product, and division
• Reconciliation and payment of suppliers, taxes, superannuation
• Reconciliation and follow up of customer amounts owed
• Reconciliation of bank accounts and credit cards etc
• Monthly accounting entries for non-cash transactions such as depreciation of assets and amortization of large amounts due such as yearly insurance (break it down into monthly amounts)
• Tax returns such as GST/VAT and staff payroll taxes due
• Reconciliation of Work in Progress and stock on hand
• Reconciliation of intercompany loans/accounts and suspense accounts
• Foreign exchange transactions – accounting for losses/gains

5. A Spreadsheet System

A spreadsheet is a great tool for calculating things like:

• Pricing – you can gather up all your direct costs then add on a margin to work out price. Conversely if you need to adhere to a price you can deduct a margin and work out how much you have available for cost of the item.
• Markup – once you know your cost you can add on a markup to achieve your desired margin.
• Breakeven – this is a very important number to understand. It’s the sales you need to make to cover your running expenses after direct costs of the product/service.

As well as anything else really that you want to work out to ensure you’re on the right track.

6. A Logical Brain!

Businesses run on ‘gut feel’ can sometimes succeed, however those run with good logical thought processes are much more likely to prosper.

Selling things you love is great, but if you’re not charging the right price and running things efficiently and cost-effectively, you will really struggle to make a good enough profit for all your efforts. It’s so easy to decide on a price by simply trying to match competitors.

If you aren’t absolutely sure what price you should charge your customers, you could risk not charging enough and eventually go out of business due to lack of profit. Taking some time to do some proper analysis before you get started can save you lots of headaches and agony down the track. It may seem like a boring and unnecessary step when you just want to get on with the exciting stuff of selling and making things, but it will save you lots of money if you pause to ensure you’re on the right track at the beginning.

If you’re not a natural left brain logical thinker (many entrepreneurs are right brain creative) do yourself a favour and find someone who can guide you and keep you on the right track. They could be a great resource and ‘sounding board’ for your fantastic ideas to ensure they are profitable!

This is a guest post by CFO On Call, for more information visit CFOonCall.com.au.