How to forecast cash flow management problems

Cash flow is one of the most important factors to a business’s success. Too little revenue coming in or too much going out will cause any organisation struggle to stay afloat. Cash flow management 

For those who own a small business in Australia, future proofing your cash flow management strategies is a crucial consideration. Without this forethought, it is likely that your organisation could become one of the 51 per cent of businesses that cease trading within the first four years of operations.*

As more companies launch in Australia, this inevitably leads to an increased number of insolvencies and closures. In fact, a recent report from Dun & Bradstreet (D&B) shows that year-on-year business failures have increased by 9.6 per cent, compared to just an 8 per cent increase in total business startups. Still, total company launches outnumber failures by a significant amount.

Despite the rising number of business closures, Australian companies are relatively confident about the future, according to D&B. Optimism is strong among local businesses, with 64 per cent more positive about growth this year.

“At face value, the increase in business failures is concerning, but in a vibrant economy where risk taking is to be encouraged, there will always be some businesses that simply don’t make it,” D&B Economic Advisor Stephen Koukoulas explained.

To ensure your small business can be one of the 49 per cent of startups that continue operating beyond four years, now is the best time to consider your cash flow management forecasting strategies. Anticipating problems before they become major issues is a simple and effective method for increasing your business’s chances at long-term success.

Here are four steps you should take to make the most of accurate and beneficial revenue forecasting:

1. Know where the market is going

One of the most significant influences on small business cash flow is how the market as a whole is performing. When your industry is facing significant legislative, consumer, and corporate challenges, it is likely that your business will also be affected.

It can therefore be helpful to keep track of reports such as the D&B, Roy Morgan, and NAB business expectations surveys. By monitoring the levels of optimism regarding the future, you can make strategic decisions related to your own planning.

Additionally, these monthly publications often provide insights into how other companies are responding to threats, including predictions on what factors are more likely to influence future growth.

You can potentially improve your ability to forecast and adapt to changing markets and industries by keeping an eye on business sentiment surveys.

2. Create a business plan

In some cases, cash flow management is a reflective process – with businesses responding to the revenue they receive rather than creating strategies to sustain this income. However, a failure to look ahead can lead to serious issues when decisions regarding costs are made without foresight.

Business plans should therefore incorporate the past, present, and future to create strategic moves that will result in long-term benefits. For example, when your business needs to buy new equipment, it is important to consider whether now is really the best time to make the purchase.

You could find that by reflecting on your past performance and considering future threats, it is better to save the money to bridge potential revenue gaps and buy the equipment further down the track.

3. Automate

Automating your receivables will not only help streamline the cash flow process, but can also help you analyse and predict payment trends.

By offering your customers a flexible digital payment solution, you can more accurately keep track of when cash will arrive in your accounts. Furthermore, with direct debit cloud integration, your payment software can store previously collected data to help you review past invoices and plans to save time and resources.

4. Review

One of the most important factors to consider when making plans for the future is how volatile your industry could be. With so many potential influencers, such as legislative and political changes, emerging technologies, and consumer demand your business plan could easily become outdated and redundant.

It is therefore vital that you regularly review your forecasts to ensure they remain accurate and applicable to your business and industry.

If you enjoyed this article, read our top article Our experts’ top strategies to getting paid on time to see how you can further reduce cash flow management problems.

*Source: McCrindle Research.