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 both 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 £5,000, put aside £416.66 each month to be
sure you can afford it next year as well.
When you have factored in all these expenses and come up
with your monthly average, you now have your break even
point. This is the minimum monthly amount you need 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 what your goal is 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.
Calculate the average lifetime value of each customer based
on the information you have or - if you are product based
business - the average sale value.
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 starts to occur, you will be in
a better position to be able to do something about it - may
be by making more phone calls or increasing targeted
advertising.
One thing is for sure, if you remain on top of these
numbers, you will be able grow your business more solidly
and successfully in the medium and long term.
----------------------------------------------------
Jim Haines works for Just Accountants, the UK accountancy
finder. See http://www.justaccountants.co.uk/local.html for
details.
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