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Understand where the cash goes

If you are a small business owner, one of the most important things you can do to ensure the survival of your company is to create a cash flow forecast. Think of it as a roadmap - without it; you just can't get to where you need to be. A cash flow forecast helps you make sure that you have enough funds for growth and simple day-to-day functioning; the more detailed it is, the more effective it will be. An accountant who is a CPA/CA can help you set up a cash flow forecast that breaks down finances yearly, monthly, and even weekly.



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Sometimes it makes sense to sit back and review your processes


A cash-flow forecast should always be used as a guide. While no one can actually predict the future exactly you should be able to have some reasonable guesses. While you cannot expect a business to follow the forecast accurately, it is a very useful tool to predict likely financial problems that the business might encounter and enable you to plan for them.

One crucial point to note at this stage is that a cash flow forecast is not a predicted profit and loss account, it is a prediction of the flow of money in the business. It is a planning tool to predict future cash requirements to lower the chances of a financial crisis in the business. A profit and loss account would show sales within your business when the customer makes the purchases, whereas a cash flow forecast would not show that same sale until you would have expected to have been paid, so for example if you were to sell goods with thirty days credit to your customers the cash flow forecast would show that sale a minimum of thirty days later. Likewise, if you are expecting to buy stock and get thirty days credit from your supplier, then the cash flow forecast would show this purchase thirty days later.

The first thing you should do when creating a cash flow forecast is to determine the amount of money you anticipate taking in each month. Be practical about this. For example, if you have a 30-day billing cycle, but your clients tend to pay their bills in 45 days, you must take this into consideration. Make sure to add in the money that you will get from accounts receivable during the first months of the year. You should also be sure to forecast in money that you will receive from other sources, such as bank loans, refunds, or deposits from customers.

Of course, you should also identify your expenses with the help of an accountant. A CPA/CA will encourage you to look at all your expenses for prior years and months, including rent, leases, payroll, travel,1300 number costs and entertainment. You should also single out any loans or fixed assets you will repay in the coming fiscal year. Make sure to add in any money you will repay in the first months of the year. You should already have this tally by the end of December. However, your repayment schedule should not include non-cash expenses. Items such as amortization and monthly depreciation should be taken account of in your financial statements, which an accountant who is a CPA/CA can help you to compile, as well.

If you are a new business, your cash flow forecast will probably not exactly match up to your first month's finances. This is quite normal and no reason to be alarmed. However, you should go over each month's cash flow and compare it against your forecast with the help of your accountant. Accountant can help you update your cash flow forecast when new expenses are introduced, or sales unexpectedly go up. As you review your actual cash flow and your forecasted cash flow each month, ask yourself if the two match up. If there is a significant difference, is it a financial gap that your company can handle?


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