Using Cashflow Forecasts To Help Your Business
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Wouldn't it be nice to be able to predict the future? This would be
especially useful for small business owners trying to predict trends and assess
future cash flow.
Well, it's far from an exact science, but the good news is that you can use
cashflow forecasts to assess trends and take better control over your business.
Predicting Your Expenses
This is the simplest part of cashflow forecasting because you already know
many of your historical expenses (wages, office rental, etc.).
You should use both your historical expense figures in combination with
already earmarked promotional and business expenses for the future to determine
your average monthly overhead.
You will find that even bills that can fluctuate on a monthly basis, such as
telephone bills or office supplies, have a monthly average.
There will be other, one off expenses that you will need to set money aside
for - such as an exhibition or yearly insurance bills. Set aside enough money
each month to cover these expenses when they arises. For example, an exhibition
costs £5,000, put aside £416.66 each month to be sure you can afford it next
year as well.
When you have factored in all these expenses and come up with your monthly
average, you now have your break even point. This is the minimum monthly amount
you need to break even every month in your business.
Knowing this can help focus your mind on what you need to do to ensure that
this minimum is met each and every month. Just knowing what your goal is will
benefit your business.
Predicting Your Income
Predicting your company's income is, unfortunately, a lot more tricky than
predicting your expenses. It is, of course, even more difficult if your business
is brand new or if you are launching a new product.
However, you do have enough data to make reasonably accurate predictions on
an 'average monthly' basis and anyway, these predictions can be refined every
week or every two weeks based on additional information you have gained.
The first step is to review your sales and marketing process. Look at the
data you have for the number of phone calls you make each month or the number of
visitors you get to your website and work out how many convert into new
customers or clients.
Secondly, look at the value of each new client or customer. Calculate the
average lifetime value of each customer based on the information you have or -
if you are product based business - the average sale value.
Now, you can start to put together forward looking income predictions based
on the average number of new customers gained per month and the average value of
Additional factors will have to be included, of course. The most essential of
these is how long it takes to get the money from your clients.
Also if you have a business that retains clients month after month and has
recurring income from those clients, you will need to look at those average
monthly values plus the drop out rate of current clients.
Once you have all these variables in play, you can start to predict monthly,
quarterly, even yearly income.
Test, Revise and Test Again
Every month, or every week, if you would prefer, you can revise these numbers
and test your predictions against real information. If a downturn starts to
occur, you will be in a better position to be able to do something about it -
may be by making more phone calls or increasing targeted advertising.
One thing is for sure, if you remain on top of these numbers, you will be
able grow your business more solidly and successfully in the medium and long
About the Author
Jim Haines works for Just Accountants, the UK
finder. He also writes his own
Follow us @Scopulus_News
Article Published/Sorted/Amended on Scopulus 2008-03-24 22:51:25 in Business Articles