The Importance of Forecasting Cash Flow

Intuit’s study found that 61% of small businesses around the world struggle with cash
flow, and nearly a third are unable to either pay vendors, pay back pending loans, or pay themselves or their employees due to cash flow issues.

Cash flow issues are detrimental to any business and its important to tackle these problems before they get out of hand. There are many scenarios in a business that cause cash flow issues to arise, I am going to point out the most common issues faced by service-based businesses and how to project cash flow.

Common Cash Flow Issues Faced by Service-Based Businesses
Clients not paying their monthly invoice on time. We all have those clients who forget to pay their monthly invoice and end up paying large sums of cash when they remember to pay you. This causes huge cash flow bottle necks for your business because payments become sporadic and unpredictable. Client’s need to pay on time so that you can cover your monthly expenses without having to sweat. Once you get your clients paying in a timely fashion you can then project cash flow to plan for future revenues and expenses. This creates financial visibility because you will know exactly what revenue is coming in and what expenses are coming out every month.
This goes hand in hand with the above mentioned, but you should be consistently invoicing clients. Billing clients using a subscription-based revenue model rather than on a project basis will elevate your business and allow you to scale. PREDICTIBILITY is key in a business and if you know where and when those revenues are coming from you can grow your business at a faster pace.

How to Forecast Cash Flow
It is important to forecast cash flow because it creates a road map for the months ahead. Forecasting cash flow helps you plan and make those financial decisions that are so crucial to your business. It gives you clarity about your revenue streams and what to expect in the upcoming months.

Begin by creating a new excel sheet and list your clients, services, and future months in different columns. Forecast your projected revenue by month for what is currently contracted for at least the next 12 months. Then, total all months for each row.
Next, we will need to consider new revenue opportunities from existing clients, it is important to consider this because it is easier to gain more sales from existing clients. Start by creating a chart like the one above and add a column for profitability and annual revenue. If applicable, add any new services that are being launched. Then, we need to fill in the probability for closing new revenue from existing clients by allocating 25%, 50%, 75%, and 90% probability. For opportunities you just started discussing use 25%, use 50% when you have pitched the service and there’s significant interest, use 75% if there is a verbal commitment, and 90% when you have sent a contract. You can use this method for prospective clients as well.

Once you have created your existing revenue and new revenue forecasts you can look more closely at expenses and profit. Do you have a revenue plan for the next 12 months?

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