How to plan a cashflow forecast for your salon or barbershop
Cash-flow is the lifeblood of your salon or barbershop. You could have a fantastic idea and a perfectly viable business, but without adequate cash-flow, you’re simply not going to be able to operate effectively.
Cash-flow is the accessible money you have in your salon at any given time. It is the money you use to pay the rent, business rates, utility bills, staff wages, suppliers and VAT to name but a few. Like most businesses, you will probably have a time lag between providing services and getting paid, so you have to make sure there is enough cash in the business to cover these expenses until your payments come in.
A cash-flow forecast is a vital and relatively simple piece of financial planning that uses the available information you have to predict how much money will be coming in and going out of your salon or barbershop at any given point. A good cash-flow forecast is one of the most important pieces of financial planning you can do, so here’s a little help to get you started.
1. Err on the side of caution
Being realistic or even pessimistic when drawing up a cash-flow forecast will give your salon or barbershop the very best chance of survival. Underestimating your incomings and overestimating your outgoings can help to ensure there’s always a healthy level of cash in your business. If you do not predict your income sensibly, a cash-flow forecast is not worth the paper it’s written on. Estimating your sales will grow by 20 percent over the next three months is all well and good, but if your sales remain the same, will you have enough cash to pay your bills?
2. Account for the time lag
Think carefully about when money will actually enter and leave your account. You might invoice for a big order in January, but if you give payment terms of 90 days, the money will not be in your account until April. During this time, it’s essential you still have money in the salon to pay your ongoing expenses. The same can be said for money leaving the company. If you use a business credit card to pay bills or purchase new equipment e.g. hair dryers, make sure you consider when the money will actually leave your account.
3. Don’t overlook smaller items
Include every possible item of income and expenditure in your cash-flow forecast. You might not think the occasional missed expense like new printer ink or the odd utility bill will make much of a difference, but over time these smaller expenses will soon add up. If you have a month or two when sales are down, it could be these forgotten expenses could come back to haunt you. If in doubt, it’s always better to account for too many expenses than too few.
4. Build in best- and worst-case scenarios
A forecast is simply an educated guess, and although you might have a good idea how many sales you’re going to make next September, you really can’t be sure. One way to combat this uncertainty is to build in a best-case and worst-case scenario. This will help to steady the ship in difficult times. If you’re predicting sales of £150,000 for the year, draw up a cash-flow forecast with sales 20 percent higher and 20 percent lower than this figure.
5. Factor in seasonality
One of the biggest mistakes a business can make when forecasting cash-flow is to assume its sales will remain constant throughout the year. Most salons or barbershops will experience seasonal variations to some extent. If your sales usually fall during the winter months, make sure this is represented in your forecast. Those times when income is at its lowest are exactly when an accurate cash-flow forecast will help your business the most.
To find out how KPMG Small Business Accounting could help free up your time so you can concentrate on making your salon or barbershop successful, request a quote today.