Cashflow forecasting is your crystal ball
Cash is the scarce resource that restricts the development of any business. Having a picture of future cashflow is key for small business owners. It helps understand scenarios like how fast you can go, how much you need to sell, and when you might be able to hire your next employee. Understanding historical trends helps you forecast cashflow. Once you have a forecast you can plan for what the future brings. Not only that, the business decisions you make will be better.
This sort of project is ideal to work on with your accountant. In fact many Xero Partners are doing just that with their clients. Here’s how:
Start with the Cash Summary Report in Xero. This explains the historical trends of cashflow and it’s in a Profit & Loss format.
To build a cashflow forecast, pump the Cash Summary Report out to Excel and use the historical data to map the likely results forward. All Xero Reports are exported with the formulas in the background which makes it easy to take the base numbers and project them forward. Considering the Accounts Receivable and Payable amounts will provide a fairly good idea of what the next few months might look like.
Regular monthly fixed costs like rent and telephone should be relatively easy to project. Working through the revenue model of the business will help determine the likely invoicing and timing for collection. Variable costs can generally be mapped as a percentage of sales. If labour is a big part of the business it might be worth constructing a specific model for wages and salary – these may be fixed or variable. Finally don’t forget the non-operating items such as tax payments and asset purchases.
Once the models have been built they can be updated on a monthly basis with the actual results from the Cash Summary Report in Xero. Take some time to consider why the actual results were different from the forecast. The more often the model is updated, the more the forecast will help with the projections in the future.
Creating a cashflow forecast is one of the ways we’re seeing accountants build a higher value relationship with their client. Often it’s the starting point for other services and it gives both parties an idea of how fast the business can run.
Download a cashflow forecast example.
Whether you’re a small business owner or an accountant we’d love to hear how this has worked for you on the Xero Community. You can also share your experiences about how business and owners and accountants are working together.
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