Here’s How You Should Do Cash Flow Forecasting for Your SME 

For small and medium-sized enterprises (SMEs), cash flow is the lifeblood that keeps the business running. Yet, many SMEs struggle with managing their cash flow effectively, leading to challenges that can jeopardise their growth and stability. Cash flow forecasting is an important instrument that helps you predict your business’s future financial position, enabling you to make informed decisions and ensure that your enterprise remains on solid footing. In this blog, we’ll explore the process of cash flow forecasting, its importance, and actionable steps to create an accurate forecast that will empower your business to thrive with enough funds in the future. 

What is Cash Flow Forecasting? 

Cash flow forecasting is the process of estimating the amount of money that will flow in and out of your business over a specific period. This involves predicting future cash inflows (such as sales revenue and loan proceeds) and outflows (such as operating expenses and loan repayments) to help you anticipate periods of cash surplus or shortage. 

Difference Between Cash Flow Forecasting and Budgeting 

While both cash flow forecasting and budgeting are crucial financial planning tools, they serve different purposes. A budget outlines your planned expenses and revenues over a period, typically a year, and is a key aspect of strategic planning. It sets financial goals and limits. On the other hand, cash flow forecasting, particularly in the context of SMEs, focuses on the timing of cash movements, ensuring that your business has enough liquidity to meet its obligations as they come due. This is especially important for SMEs as they may not have access to the same resources and funding options as larger corporations, making cash flow forecasting a vital aspect of corporate finance for small businesses. 

Why Cash Flow Forecasting Is Important for SMEs? 

Cash flow forecasting is vital for businesses as it helps in predicting future cash inflows and outflows. It enables better planning, budgeting, and decision-making, ensuring that the company has enough liquidity to meet its financial obligations and seize growth opportunities. 

Key Components of a Cash Flow Forecast 

Cash Inflows: Sales Revenue, Operating Cash Flow, Investment Income, Loans, etc. 

Cash inflows are the funds that your business receives from various sources. These include sales revenue, operating cash flow, investment income, loan proceeds, and any other income that contributes to your cash reserves. 

Cash Outflows: Operating Expenses, Loan Repayments, Capital Expenditures, etc. 

Cash outflows represent the money leaving your business. This includes operating expenses like rent, salaries, and utilities, as well as loan repayments, capital expenditures, and any other costs that reduce your cash reserves. 

Net Cash Flow: Difference Between Inflows and Outflows 

Net cash flow is the difference between your total cash inflows and outflows over a given period. Positive net cash flow indicates that your business is generating more cash than it spends, while negative cash flow suggests that your outflows exceed your inflows, which could be a warning sign of potential financial trouble. In other words, negative cash flow means that a company is experiencing a negative net cash flow, which can lead to financial difficulties in the long run. 

Steps to Create a Cash Flow Forecast 

Let’s imagine you own a small retail business, “Bright Lights Electronics” which specialises in selling consumer electronics. You want to create a cash flow forecast to ensure that your business remains financially healthy. Here’s how you would go through each step: 

Step 1: Gather Historical Data 

To start, you’ll need to gather your financial statements from the past year. This includes your income statements, balance sheets, and cash flow statements. By reviewing these documents, you notice that your business typically has higher sales during the holiday season (November and December) and lower sales during the summer months. You also see that your largest cash outflows occur in the first quarter, due to annual rent payments and restocking inventory after the holidays. 

Example Data: 

• Average monthly sales (January to October): SGD$50,000 

• November sales: SGD$80,000 

• December sales: SGD$100,000 

• Monthly fixed expenses (rent, utilities, payroll): SGD$30,000 

• Annual rent payment in January: SGD$20,000 

Step 2: Estimate Future Cash Inflows 

Next, you’ll estimate your future cash inflows based on sales projections and other income sources. Given the historical trend, you project that your sales will follow a similar pattern this year. You also factor in expected receivables from credit customers who typically pay within 30 days. 

Example Projections: 

• January to October sales: SGD$50,000 per month 

• November sales: SGD$85,000 (slight increase due to a planned marketing campaign) 

• December sales: SGD$105,000 

• Receivables (customers who will pay next month): 10% of monthly sales 

Step 3: Estimate Future Cash Outflows 

Now, you need to estimate your future cash outflows. This includes all fixed and variable expenses such as rent, utilities, payroll, inventory purchases, and any loan repayments. You also consider seasonal expenses, like an additional marketing budget for the holiday season and a one-time equipment upgrade planned for July. 

Example Projections: 

• Monthly fixed expenses (rent, utilities, payroll): SGD$30,000 

• Annual rent payment in January: SGD$20,000 

• Inventory restocking in January: SGD$40,000 

• Additional marketing spend in November: SGD$10,000 

• Equipment upgrade in July: SGD$15,000 

Step 4: Develop a Cash Flow Forecasting Template 

With your estimated inflows and outflows, you can now create a cash flow forecasting template. You decide to use a spreadsheet where you list all projected cash inflows and outflows for each month. Your simple template includes columns for cash inflows (sales, receivables), cash outflows (expenses, loan repayments), and net cash flow (difference between inflows and outflows). You also include a running balance to track your cash position month by month, starting with the opening cash balance. 

Example Template: 

Step 5: Regularly Update and Review Your Forecast 

Finally, it’s important to regularly update and review your cash flow forecast. Each month, you’ll compare your actual cash inflows and outflows against your forecast. If sales are lower than expected or expenses higher, you’ll adjust your forecast accordingly. For example, if sales in August are lower due to an unexpected market downturn, you might revise your projections for the rest of the year and cut back on discretionary spending. 

By regularly updating your cash flow forecast, you ensure that your business remains financially agile and prepared to handle any challenges or opportunities that arise. 

Benefits of Cash Flow Forecasting 

Improved Financial Planning and Decision-Making 

Cash flow forecasting provides a solid foundation for financial planning. By knowing when your business will experience cash surpluses or shortages, you can make informed decisions about investments, expansions, and other significant expenditures. 

Enhanced Ability to Anticipate and Mitigate Cash Shortages 

Forecasting enables you to anticipate cash shortages before they occur, giving you time to take corrective actions such as cutting expenses, negotiating better payment terms with suppliers, or securing a short-term loan. 

Better Relationship with Creditors and Investors 

Consistent and accurate cash flow forecasting can improve your relationship with creditors and investors by demonstrating that your business is financially responsible and well-managed. This can lead to better credit terms and increased investor confidence. 

Ability to Seize Growth Opportunities 

With a clear understanding of your future cash position, you’ll be better equipped to take advantage of growth opportunities as they arise. Whether it’s launching a new product, entering a new market, or acquiring another business, cash flow forecasting helps ensure you have the necessary resources to move forward. 

The Role of Technology in Cash Flow Forecasting 

While a simple spreadsheet can be effective for basic cash flow forecasting, using tools can significantly enhance your forecasting accuracy and efficiency. Here’s why: 

• Real-Time Data Analysis: Software can provide real-time insights into your cash flow, allowing for more accurate forecasting and timely decision-making. 

• Automated Reporting: Many tools offer automated reporting features, saving you time and reducing the risk of human error. 

• Streamlined Processes: Software tools integrate financial data seamlessly, eliminating the need for manual data entry, making the process faster and more reliable. 

Choosing the Right Tools: 

• QuickBooks and Xero: These popular accounting software solutions, such as QuickBooks and Xero, offer built-in cash flow forecasting functionalities and can integrate your financial data seamlessly. 

• Grof: Specifically designed for startups and SMEs in Singapore, Grof offers expense management solutions that eliminate the tedious reimbursement process by issuing virtual cards to team members, allowing you to easily track multiple user expenses. Users can also efficiently manage customer billing, ensuring timely payments without delays. 

Features to Look For: 

• Ease of Use: The software should be user-friendly, even for those without accounting expertise. 

• Data Integration: Look for software that can seamlessly integrate with your existing accounting system, eliminating the need for manual data entry. 

• Collaboration Features: If multiple people in your organisation need access to the cash flow forecast, consider software with collaboration features to facilitate teamwork and communication. 

Common Challenges and Solutions 

Even with the right tools in place, creating and maintaining accurate cash flow forecasts can be challenging. Here are some common hurdles and how to overcome them: 

• Dealing with Uncertainty and Variability: Economic conditions, customer behaviour, and supplier pricing can all be unpredictable. Regularly update your forecasts to reflect changing circumstances, and consider using scenario planning to explore different possibilities. 

• Managing Unexpected Expenses: Unexpected expenses are a reality for every business. Maintain a buffer in your cash flow forecast to account for unforeseen costs. Having a line of credit or an emergency fund can also help you weather unexpected financial storms. 

Best Practices for Effective Cash Flow Forecasting 

To ensure your cash flow forecasts are as accurate and valuable as possible, follow these best practices: 

• Maintain Accurate and Up-to-Date Records: The accuracy of your cash flow forecast hinges on the quality of your financial data. Ensure your accounting records are up-to-date and accurate. 

• Involve Key Stakeholders in the Forecasting Process: Get input from different departments within your business, such as sales, marketing, and operations. This will provide a more comprehensive view of your operating cash flow. 

• Use Conservative Estimates for Revenues and Expenses: It’s better to underestimate your revenue and overestimate your expenses in your forecast. This will help you avoid operating cash flow shortfalls and ensure you’re prepared for the unexpected. 

• Continuously Monitor and Adjust Forecasts: Don’t treat your cash flow forecast as a static document. Regularly monitor your actual cash flow and adjust your forecast accordingly. 

Conclusion 

Cash flow forecasting is a powerful tool that can empower SMEs to make informed financial decisions and ensure their long-term success. By following the steps outlined above and utilising the right tools and best practices, you can create a cash flow forecast that provides valuable insights into the financial health of your business. 

Ready to get help from Grof? Grof empowers your business with the ability to see and control every expense instantly. With Grof, you can automate bill payments, manage cash flows, and streamline multi-user spending and reimbursements with ease, giving you more time to focus on growing your business. 

Looking for accounting services? Grof can help liberate your business with our all-in-one outsourced accounting solutions in Singapore. We manage everything from bookkeeping and payroll to tax compliance, ensuring your finances are in expert hands. Plus, we specialise in GST registration and filing, taking care of the entire process for you, from determining eligibility to completing the registration.