Tradies spend a lot of time getting work done on various projects for clients with the goal of business growth and profitability. Business growth and profitability are closely related, on the one hand, growth requires a tradie to be in control or have oversight of the various business functions and profitability on the other hand, is as a result of sound financial management principles.
For a business to survive in the long run, a business owner needs to be able to predict future business trends including projected income and expenditure. The latter is referred to as cash flow forecasting.
Speaking to a qualified accountant will ensure that you understand the full benefits of cash flow forecasting and how it can add value to your business.
What is a cash flow forecast?
A cash flow forecast is a projection of an organisation’s future financial position based on anticipated payments and receivables. In other words, it is a document that helps to estimate the amount of money that a business will receive as income or the expenses that will be incurred. Cash flow forecasts usually cover periods of about 12 months.
One way of managing your cash flow is reviewing working capital management. This refers to managing your stock levels (if you hold any stock), managing your accounts payables and accounts receivables, thereby improving cash flow. Another way of proactively managing your cash flow is by using forecasting.
Why use a cash flow forecast?
Cash flow forecasts are primarily used to help the business owners plan how much cash they’ll need in the future. Usually cash is required to pay for day to day expenses and other monthly bill payments.
Running out of cash can lead to insolvency. This means that a business’s liabilities exceed its assets. However, cash flow forecasting is a reliable way of avoiding insolvency and improving profitability.
Cash flow forecasts can also help business owners to plan. Knowing how much your business has and what it could potentially make can help business owners make key decisions such as recruitment.
Furthermore, banks look at a business’s cash flow in order to determine its ability to pay back loans. Having access to capital allows businesses to take advantage of opportunities to grow.
Forecasts also help business owners compare how the business is performing at different times. It basically outlines what the business could potentially make by a certain date; any negative variation could be an indication of suboptimal business performance, creating an obvious need to adjust and take corrective measures.
Cashflow forecasting helps in setting up accurate budgets. Tradies need to be able to make informed decisions when considering purchasing new equipment or vehicles for the business.
Elements of a cash flow forecast
Looking at your historic sales trends can give you a glimpse into how your business will most likely perform in a given future time period. It is also important to take into consideration seasonal changes including how promotions influenced sales.
Projected payment periods
Having a large debtor’s book could lead to cash flow problems. However, estimating when you usually receive payments from clients is a key element in cash flow projections.
Costs such as rent and salaries (fixed costs) and costs to purchase raw materials and stock (variable) should be included in the cash flow projections.
Tradies Accountant provides professional Accounting services tailor-made for trade businesses. We have worked with several trade businesses focusing on profit improvements, cash flow forecasting and quarterly planning.
Contact us today.