Building out a cash flow forecast is tricky to do correctly because there are so many variables that affect it. When you think about what it takes to get a personal income and expenses statement correctly, it gives an inkling about how difficult it is to do so at the corporate level. The number of factors that can be incorrect and show miscalculation is far greater than with personal finances. It makes it all the more difficult to produce a business cash flow forecast that’s reasonably reliable.
Here are 3 budget busters that tend to make cash flow forecasts less than reliable.
Not Putting Enough into Reserves
A business is responsible for the repairs and maintenance on the building. So, the facades and outside sidewalks within the grounds must all be factored into the repairs and maintenance costs associated with the office building. Big equipment in a factory and even factoring in getting computer repair instead of assuming it will never go wrong during its useful life are areas that commonly get overlooked.
Put simply: Things break, malfunction and stop working through wear and tear or just bad luck. Items commonly get far more use in a commercial environment than does the home office laser printer, for instance, so one cannot use how often things breaking down at home as a guide.
Failing to budget properly by putting sufficient monies into reserves to cover future repairs and maintenance is a mistake that causes every little thing that goes wrong to become a bigger drama that it needs to be.
Pivoting More Often Than Expected
It’s a popular business idea currently to pivot from one idea to the next when the first plan didn’t work out. That’s all well and good, but a significant change in direction will often require new personnel with experience in the new field, different equipment and perhaps even a change of premises that supports the new direction.
With smaller pivots or dealing with an emergency packaging situation like failing to put the correct barcode and disclosures on product packaging necessitating a recall and repackaging order can throw a major spanner in the works. When things change drastically or go wrong in unexpected ways, the costs increase. If your business style is to try things out and then pivot to the next thing or you make simple mistakes that tend to be costly, then budget accordingly.
To get help with your budgeting for these usual items, check out overheadwatch.com which specializes in managing overheads and expenses better.
Being Too Optimistic with Initial Sales
It’s a very common mistake of new businesses to let the excitement of the new ideas override good sense with sales projections. In most businesses, sales grow far slower than the sales team believes, and the startup costs are much higher than projected. The situation gets many companies into trouble with their cash flow as a result. Don’t make the same mistake.
If you’re not able to set realistic sales targets, at the very least halve whatever projects you already have or even take two-thirds off. While that might seem drastic, at least you’ll be erring on the side of caution with your numbers which will help avoid running out of working capital before the sales revenue rolls in.
In most cases, being overly cautious is a good thing with cash flow forecasts. When you don’t think you’ve included every possible business expense, add a line item for miscellaneous costs you haven’t anticipated. Cover as many ‘What Ifs’ as possible and expect the unexpected.