Post sponsored by Purple Lime
We have all heard the saying ‘cash is king’. But what does that actually mean?
In simple terms, it means that without cash, your business can’t survive. Businesses need cash to be coming into the business to cover costs and then to make a profit in order to stay afloat. But if you don’t know what is coming in and out of the business, and when, it can be all too easy to overspend, and end up in debt, or unable to deliver products and services without the funds to support it.
The key to keeping track of your purse strings, ensuring you don’t overspend and that your business is doing well is in one simple tool. Cashflow forecasting. And with Xero, it has never been simpler to create and use your own cashflow forecast.
The What and Why of Cashflow Forecasting
Starting at the beginning, cashflow is really just the fashionable term for the money moving (or flowing) in and out of your business every month. That really is all there is to it. And while it might seem like the flow only goes one way sometimes (usually out), it really does go both ways. Cash flows into your business from customers buying your products and services, creating an income stream, and cash flows out in the form of payments and expenses – like rent, supplies or taxes.
You can think of your cash flow a bit like your bank balance. If you have more coming in than going out, you have positive cash flow. If you have the opposite, with more going out than coming in, you are in negative cash flow and will quickly run into problems. For businesses, the aim is to stay as much in the positive as possible. But in order to do that, you need to be able to forecast what will happen in the future. This is where a cashflow forecast comes in.
A cashflow forecast is a document that predicts the movement of money in and out of your business at any given time. Businesses can use cashflow forecasts to almost ‘look into the future’, to see when they will have surplus funds, or where they have dips in sales so that they can look at ways to improve during those times. Since cash is the lifeblood of any business, knowing what it is doing and how your business is performing over the months and the year is vital to growth.
So, if you have never created a cashflow forecast for your business, where do you start? First, you will look at the basics of a cash flow forecast. The ingredients are quite simple really:
- Decide how far you will plan into the future (3 months, 6 months, 12 months?)
- Estimate your sales (you can be rough here)
- Estimate your costs (you should have a pretty good idea of these)
- Plot out when you will be paying and receiving money
Don’t be tempted to go too far into the future though – over 12 months and everything starts to get a bit difficult to predict, and the further you get into the future, the more uncertain your cashflow forecast will get. It will also be influenced by the type of business you are. For example, if you are a software developer building apps on a 2-year development cycle, you may need a forecast to cover that 2-year cycle. But if you are a retailer selling bespoke Christmas decorations, you will only want to forecast one year at a time. Once you have chosen how far your cashflow will go, the next step is to make a list of your financial activities. This includes:
- Create your sales forecast
- Forecast your costs
- Add in the extras (including things like seasonal sales spikes and VAT)
- Pull it all together into one place
This will give you an idea of what you have coming in and out of your business (and when) over your time period, which is what a cashflow forecast is all about! If you are an established business, then you can use the data from previous years to give you a head start and provide a solid idea of what you can expect in the future.
Of course, if you are not great with numbers, don’t like spreadsheets or just think all of this sounds like too much work (we wouldn’t blame you) then there is an alternative.
What can Xero do to Help?
As we mentioned earlier, the key to creating a cashflow forecast is an accurate prediction of your income and expenses. The best way to do this is to use information you already have from past years. With Xero, there is a record of every invoice you ever raised, along with every penny you have ever spent and what you spent it on. Using automatic bank feeds, tools like hubdoc to manage receipts and Xero expenses, you can have a truly accurate overview of your past business performance.
Building on this information, Xero has a whole host of features designed to help you understand your business cashflow, and create your cashflow forecasts for you. The most useful we have found are:
- Business Snapshot: A visual dashboard of key financial metrics, showing you your business performance at a glance. You can view things like income, expenses, average time to get paid and average time to pay suppliers. This can also generate a balance sheet and cash balance for you, giving you the information you need to identify trends and evaluate where your business is at.
- Short-term Cashflow: This tool takes all of the relevant data from your Xero account, and gives you an up-to-date view of your business’s cashflow in one place. Using this data, it then builds a projection for the next 30-days, showing you the impact of existing bills and invoices if they are paid on time. You can also edit fields, so you can see the impact on your business if you pay an invoice this week or next week.
- Apps: Of course, if you want support in creating a more long-term cashflow forecast, the Xero App Marketplace is full of applications that can help. The four that Xero recommends are Fitrili, Float, Spotlight Reporting and Fluidly.
Of course, if numbers really are not your thing, or you are struggling to get your cash flow right, there are other resources that can help. At Purple Lime, we specialise in using Xero to help business owners create and understand their cashflow forecasts. As Xero Gold Partners, we can give you access to enhanced tools that will shed light on your performance, and help you make more informed decisions about your business finances. If you would like to know more, please get in touch to book your free consultation by emailing firstname.lastname@example.org, or calling us on 01249 691360.
Visit Purple Lime online at: www.purplelime.uk.com