Sponsored Post

When considering a business loan, lenders need to understand the money flow of the company to determine how the new funds will help and how they will be repaid later.

The forecasting tool is relied upon to deliver a semi-accurate financial prediction thus preventing sticky issues with cash flow choking off a business. Therefore it ensures that the finances will never run dry. Here are a few suggestions for ways to improve the accuracy of cash flow forecasts in your business.

Focus to Be Effective

Cash flow forecasting doesn't work unless you make it a priority. The benefits far outweigh the time it takes to do it properly. Having a clearer idea about what is to come makes it easier to plan, whether that means you'll visit Merchant Money to apply for a loan so that the funds will be ready when they're needed or postponing a purchase until there's more cash spare to make the purchase comfortably.

What You Need When Preparing a Statement

To complete a cash flow statement, you need the following information at the ready:

  • Amount of working capital
  • Interest rates on overdrafts and loans
  • Conditions of lending facilities
  • Dates for when PAYE, VAT, payroll and other non-negotiable payments are due
  • Preferential payment terms for valued customers

Don't Get Surprised About VAT

For most businesses of a reasonable size, VAT applies to the invoice and the cost of goods. Accordingly, the VAT that's due (chargeable vs reclaimable) must be put aside so the payment can be made on time.

Even with businesses that are not yet registered for VAT because they only do business in the UK and haven't reached the income threshold requiring registration should plan for its future payment and consider how it will affect the future profitability too.

Pay Attention to the Balance Sheet

While the profit & loss account (P&L) and the cash flow forecast matter enormously to any UK business, not paying enough attention to the balance sheet is like not seeing the forest for the trees. Balance sheet transactions such as loan repayments, PAYE details, VAT accruals and new fixed assets can have a meaningful impact on the business cash flow too. Ensure the balance sheet is well maintained so that the numbers fed into the cash flow forecast can be relied upon.

Understand Transaction Dates vs Cash Movements

There are times when a transaction hits the P&L in the current month but doesn't get paid out until a later date. This is a perfect opportunity to use the cash flow forecast properly to highlight the financial reality vs the P&L unreality at times.

Cash Flow Forecasts Improve Banking Relationships

Businesses that come prepared when they're asking their banker for a business overdraft are more likely to get one. When the figures are as accurate as they can be and have also been shown in the past to be reliable, then a bank is more likely to look favourably on an overdraft application. The planned overdraft repayment can be included in the cash flow forecast to demonstrate when it can be repaid. It's likely the overdraft will be seen as lower risk, and this might allow you to negotiate a lower interest rate too.

Better Cash Flow Forecasts Increase Business Valuations

Companies that have a history of creating cash flow forecasts that are quite accurate are likely to be considered a lower risk with any funding or buy out offers. Predictable cash flow is the lifeblood of a business and buyers appreciate when they have numbers in front of them that they can trust.

Keep Banking Costs Lower

Making last-minute payments out and funding short-term overdrafts is an expensive way to run a business account. When planning cash flow more carefully, it's possible to avoid paying these repetitive bank charges and other fees unnecessarily. In turn, the lack of wasteful costs keeps more money in the business to cover future expenses, thus avoiding compounding the problem.

Reduce Unnecessary Borrowing

When you learn to improve the accuracy of cash flow forecasting through better attention to detail and including all the relevant information, the company and its employees do not need to borrow money to stay afloat. Whether this means not using company credit cards, skipping the overdraft or line of credit facility or not borrowing more than the business requires for growth, reducing the total borrowing makes cash flow management easier.

With practice, the forecasting of money movements gets easier and far more predictive. Things that were forgotten in the first draft of a previous forecast no longer slip the mind. Structured checklists and other tools can be utilised to ensure the latest cash flow forecast is as accurate as possible.