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 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 ٣,000, put aside 416.66 each month to be sure you can afford it next year as well.
When you have calculated all the relevant expenses and come up with your monthly average, you now have your break even point. This is the absolute minimum monthly amount you will require 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 precisely what your goals are 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. Work out the average lifetime value of each customer based on the information you have or – if you are product based business – the average value of a sale.
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 those customers.
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 does start to occur, you will be in a better position to do something about it – may be by making more phone calls or increasing targeted advertising.
One thing is certain, if you remain on top of these numbers, you will be able grow your business more successfully in the medium and long term.
Category: Cost Accounting Software