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Treasury forecast: a decision-making tool for SMEs

Treasury forecast: a decision-making tool for SMEs

How to make a treasury forecast ?” Many VSE and SME managers ask themselves that question and it’s not surprising as it’s an essential part of a business’ financial planning.
But if you are an entrepreneur or business owner, you may not be familiar with this process and may be more tempted to use an Excel spreadsheet to make your forecasts.

Drawing up a treasury forecast may seem complex at first, yet once you know the best practices, it will be much easier to make your forecasts to monitor the financial balance of your business.

What are the objectives of cash forecasting ?

Regardless of your business sector, it is in your best interest to draw up a treasury forecast plan. It allows you to ensure your company’s ability to continue its development. Thanks to a good treasury plan you will be able to assess your capacity to react in the event of financial difficulties or your capacity to invest.

You will be able to anticipate periods of reduced cash flow and be able to make adjustments such as reducing certain costs, finding ways to generate more sales or financing your working capital requirements.

If your business is thriving, you may consider expanding into new markets, investing in new areas or products, acquiring larger premises, or recruiting new employees.

How to make a treasury forecast ?

To make your treasury forecast plan, you have two options:

  • Make a forecast table using Excel
  • Choose a specialised cash management software

Excel has some advantages and some freedoms, but it does not entirely meet the objectives of an effective management of treasury forecasts. Regular manual data entry increases the risk of errors, reports that are not very explicit…

A software specialised in cash forecasting, such as Iziago, is a better choice if you want a tool that is easier to use and more accurate for your forecasts.

You can draw up your treasury forecast plan in 4 steps.

1. Determine the timeframe of your cash flow planning

Cash flow planning can cover a few weeks or even several months. Plan as far ahead as you can accurately plan.

If you are well established, you may have a predictable sales pipeline and plenty of data from previous years. It will then be easier to make stable and accurate treasury forecasts over the long term.

If your business is new, you may not have a lot of data. If you plan far in advance, your treasuryforecasts may be less accurate. But don’t worry, your cash flow will evolve over time. Then, you will get more accurate estimates and it will be easier to update your forecasts.

How to make cash flow planning ?

2. List your income

For each week or month, depending on your planning deadline, you should list all your business collections,i.e. all cash that has been received. Make sure you don’t forget any of them, whether it’s :

  • Your customer invoices
  • VAT refunds
  • Grants or subsidies
  • Loans or financing
  • Equity contributions …

Remember also that you should indicate the amounts when they are actually in your account.
The sum of all these amounts will tell you your net income.

3. List your expenses

List expenses in your treasury forecast

As with your collections, you must then list all your expenditures, i.e. all expenses incurred by the business. It includes:

  • Employees salaries
  • Remuneration of your providers
  • Social security charges
  • Your taxes
  • Loan repayments
  • Rent for your premises
  • Purchase of supplies…

Once you have listed everything you pay out, the total of the amounts will be your net expenses.

4. Calculate your treasury forecast

Once you know your net income and net expenses, you have to subtract your net expenses from your net income to find out your treasury forecasts. Ideally, you should do that on a weekly or monthly basis.

With a specialised software, such as Iziago, you will be able to generate automatically recurring forecast transactions such as rent or salaries. You can also automatically calculate your treasury forecast, with no risk of error.

You can then keep a cumulative total, week by week or month by month, to have a view of your treasury forecast over time.
Too many weeks with a negative balance can cause problems. You will have to find financing solutions to meet your commitments, pay salaries, loan repayments or rent.
But on the other hand, a few months with a positive balance could indicate that you have the means to grow or invest.

Avoiding mistakes in your treasury forecast

To avoid some mistakes, there are some factors to consider when making your treasury forecasts.

Think about payment terms

To have a stable and reliable treasury forecast plan, make sure you get paid on time. It is important to anticipate the payment terms agreed with your customers. Ask yourself : “The order my customer made in October, when will it be cashed?” Depending on the deadline you have agreed upon, the cost may have to appear on your forecast for the following month.

Likewise for your expenses, always pay attention to the payment terms you have agreed with your suppliers. When do you have to pay or when will you be charged? It is important to plan this expenditure at the right time on your treasury forecast plan. Paying attention to payment deadlines will help ensure that your business has sufficient funds in its treasury.

Watch out for variable expenses

Some expenses do not occur every month, or are not the same every month. This can be the case for social security charges, material purchases, transport costs, or electricity costs for example.
Beware, these expenses can easily be forgotten or underestimated, even though they are very important for drawing up a good treasury forecast.
You have to determine what your variable expenses really represent and why not apply conservative assumptions to anticipate them.

To calculate variable expenses

Don't forget VAT

It is important to retain all sums including VAT and not excluding taxes, this will simplify your calculations later on.
A company pays in VAT and recovers the excess VAT from the tax authorities. Also, when a company receives a payment from a customer, it collects the amount in VAT and must then pay the excess VAT back to the tax authorities.
Therefore, don’t forget to show the amounts of VAT to be paid or collected in your treasury plan.

Once you have the keys, it is not difficult to draw up a treasury forecast plan. However, it remains a time-consuming task for you need to be rigorous in order to avoid mistakes in manual data entry. This is why more and more companies require the help of specialised software. Iziago is a software designed for cash management. It allows you to draw up your treasury forecast plan easily and without error. In a few minutes, you will have a clear, precise and real-time view of your treasury.