As you might know by now, I love software! I’m a firm believer that software can make running your business, and especially your finances, much easier, and I’m always recommending new apps to my clients. So naturally, accounting software is one of my staple tools! While there are lots of different solutions out there, Xero is definitely my favourite. There are a lot of reasons for that, and I’ll happily bend your ear about it over a cuppa! But one of the biggest ones is the control it gives you over your cashflow.
We all know that without cash, a business can’t survive. Cash needs to come into the business to cover the costs going out, and then make a profit on top of it to stay afloat. But if you don’t know what’s coming in and going out, it’s easy to overspend and end up in trouble. To keep track of the money, you need to do something called cashflow forecasting, and Xero makes that particular task a breeze.
The What and Why of Cashflow Forecasting
Cashflow is really just a fancy term to the money moving in and out of your business every month. That’s it. And while it sometimes feels like that flow is mostly one-way (usually out!), there is money coming in through customers buying your products and services. This creates your income stream. That money then flows out with your expenses, like rent, supplies, or tax payments. More money coming in than going out is a positive, and more going out than coming in is negative cashflow.
Negative cashflow can very quickly cause problems in your business, like being unable to pay suppliers, which might mean you can’t order new products to sell, or you’re disconnected from services you need to run the business. You should aim to stay in the positive as much as possible, but to do that, you need to be able to roughly predict what will happen in the future. That’s where your cashflow forecast comes in.
A cashflow forecast is a document that predicts the movement of money in and out of your business at any given time. It’s used to ‘look into the future’ so that you can see when you’re likely to have surplus funds or dips in sales, so that you can plan and act accordingly. With a cashflow forecast, you’ll know when you’re likely to need extra staff and more products, or when you might need to cut down spending and increase marketing efforts.
Creating Your First Cashflow Forecast
If you’ve never made a cashflow forecast before (and lots of small businesses haven’t), where do you start? There are essentially 4 things you need to get going, and I suggest you write these down:
- Decide how far you’ll plan into the future (3 months, 6 months, 12 months?)
- Estimate your sales (roughly)
- Estimate your costs (you should have a fairly good idea of these)
- Plot out when you’ll be paying and receiving money
Depending on your business, it’s wise not to plan too far into the future. Everything gets a bit too hard to predict, and your cashflow forecast becomes more speculation than an educated guess. But there are exceptions. For example, if you’re a software company that builds apps on a 2-year development cycle, then you may well need a forecast that covers that 2-year cycle. But if you’re a retailer selling bespoke seasonal decorations, you’ll only want to forecast up to 1 year at a time.
Once you’ve decided that, make a list of your financial activities, including:
- Average product/service sales
- Seasonal rises or dips in sales
- Average payment dates/lengths
- Your set, regular costs
- Seasonal/one-off costs, like tax or VAT payments
Do this in a spreadsheet, and you’ll have a good idea of what’s coming in and out of your business, and when. If you’re an established business or have been going at least 1 year, you can even use previous sales and financial information to help with this, so it’s even easier!
And that’s really all it is! You now have a basic cashflow spreadsheet.
What’s Xero Got To Do With It?
Well, this process does take time, and if you’re not great with numbers, then it could take even longer. But if you use accounting software like Xero, all of that information is already plugged in and ready. There’s a record of every penny you’ve invoiced, along with every penny you’ve spent and what you spent it on. With automatic bank feeds along with tools like Hubdoc, Dext and Apron to manage your receipts (I told you I love an app), your Xero account can give you a truly accurate overview of your past business performance.
On top of that, Xero has a lot of different features to help you understand your cashflow, and even create your cashflow forecasts for you. My personal favourites include:
Business snapshot: A visual dashboard of key financial metrics, showing you your business performance at a glance. You can view things like income, expenses, average time to get paid and average time to pay suppliers. This can also generate a balance sheet and cash balance for you, giving you the information you need to identify trends and evaluate where your business is at.
Short-term cashflow: This is a tool that takes all of the relevant data from your Xero account and uses it to give you an up-to-date view of your business’s cashflow in one place. Using this, it will build a projection for the next 30 days. This can show you the impact of existing bills and invoices if they’re paid on time. You can also edit fields in it, so you can see how things would change if invoices were paid early or late. It’s a neat little tool!
Apps: I can’t miss these! The Xero marketplace is chock full of apps that can connect the various systems of your business together, generate more detailed reports and granular forecasting. The four that Xero recommends the most for forecasting and reports are Futrli, Float, Spotlight Reporting and Fluidity. Oh, and last year Xero also took over Syft, a fantastic financial analytics platform that can now be fully integrated into Xero to help create truly accurate reports.
Of course, if numbers aren’t your thing, you can always ask for help. At Bluebell Admin & Bookkeeping, my mission is to make sure that business owners know their numbers. I can help you get set up, as well as provide you with the snapshots and reports you need to understand what’s going on in your business and why. If you’d like to know more, or you’re just wondering what else Xero can do, get in touch and book your free consultation.