Using Xero to track your cashflow

Using Xero to track your cashflow 150 150 Purple Lime

Whatever sector you are in, when it boils down to it, no cash means no business.

Every business needs to cover its costs and make a profit in order to survive, so it is a good idea to keep track of the figures coming into and leaving your business. Without this vigilance, you may be overspending, accruing debts or even promising products or services to your customers that you will not be able to fulfil.

With all the other aspects of a business to deal with, it is important that you have a simple way of keeping track of all these expenses, and a cashflow forecast will help you do just that.

What is cashflow forecasting

Cashflow is essentially a technical term for the money coming in and out of your business every month. Income derives from customers buying services and product, and outgoings include all your expenses such as materials, staff costs and tax payments.

The ideal situation is to have more coming in than going out, creating a positive cashflow. A negative cashflow describes the situation when more is leaving your business than you are making, which can quickly lead to problems. An accurate cashflow forecast can help to avoid this situation.

A cashflow forecast takes into account your current circumstances and predicted trends within your business to look ahead and see where you may be at risk of crossing the line into a negative cashflow. If the forecast shows periods of time when you are likely to be less profitable, you have the opportunity to step in and make changes before the event. Having this detailed knowledge of the peaks and troughs of your cashflow can be key in allowing your business to thrive and grow.

How to create a cashflow forecast

The thought of putting together a cashflow forecast covering all the incomings and outgoings of your business can seem daunting but can actually be quite simple.

First, decide how far ahead you would like to plan – are you looking at the next 3 months, 6 months or year? Twelve months is probably the furthest ahead you will want to look – the further ahead you look, the more chance there is of inaccuracies in the forecast and a year is around the limit for reliable forecasting for most businesses. There are exceptions – for example if you work on projects which take a couple of years to complete, you may want to extend your forecast to cover this.

Next, take a look at what you think your sales will be. This does not need to be accurate; a general figure will help to give an idea of the strength of your cashflow. If your business is established, you can look at the figures from previous years to get an even more accurate forecast. Do the same for your costs, and then mark out the key dates when you anticipate paying and receiving money.

Once you have this basic information, you can put it all together – including things like peaks in sales and VAT costs. This should make it easy to see what is happening in your business and when over a defined period – your cashflow forecast!

This obviously takes some time and effort and as a business owner your time is at a premium. This is where Xero can help, making it easy to collate the relevant information and present it in an easy-to-read forecast.

A cashflow forecast with Xero effort

The most useful cashflow forecasts are those which are based on accurate data, taking information from your previous trading experience. When you use Xero as your accounting system, it automatically keeps track of every invoice you send, every bill you pay and all the other cashflow items in between.

Xero works with a range of tools including automatic bank feeds, receipt storage apps and expenses apps to make sure every penny is accounted for. It can then use this information to present the key information to you in an easy-to-understand fashion.

Here are some of our favourite Xero cashflow features:

Business Snapshot – An at-a-glance overview of your business, presented in an easy to understand, visual way. You can see your income, expenditure, how long it takes customers to pay you on average, and how long you take to pay your suppliers. You can also access a balance sheet and a cash balance so you can see the status of your business at any time, from wherever you are, allowing you to be fully informed to make those critical business decisions.

Short-term Cashflow – It is sometimes useful to know what is going to happen in the near future, and the Short-term Cashflow feature will use the information from your business to predict what is likely to happen over the next 30 days if everything is paid on time. You can also see the impact of late or early payments through editable fields, to help you decide if it is better to pay that invoice now or leave it for a week.

An app for everything! If you need a longer-term cashflow forecast, you can take advantage of the huge number of apps compatible with Xero to find a way to make this easy. The Xero Marketplace has lots of options, including the four cashflow apps we know and trust – Futrli, Float, Spotlight Reporting and Fluidly.

While apps are great, sometimes there is no substitute for a real person. If the idea of dealing with the numbers fills you with dread, or if things just will not add up, we can help. We are Xero Gold Partners because we use Xero to its true potential and specialise in creating cashflow forecasts and working with businesses to allow business owners to get the most out of the information they reveal.

To find out more about how a cashflow forecast could help your business planning, for advice on how to put one together, or for guidance around how to use Xero in the most effective way, get in touch with us to book your free consultation by emailing, clicking on the book an appointment button below or calling us on 01249 691360.