Tips to Increase Your Financial Awareness with Xero: How and Why Small Businesses Can Use Their Account for Cash Flow Forecasting
Many small businesses struggle with cash flow forecasting. It can be hard to keep up with the day-to-day management of your business and stay on top of what's coming in, what you owe, and how much money is going out. If you are using Xero then you're already head and shoulders above a lot of small business owners. Xero is used around the world by thousands of accountants and bookkeepers, and for good reason.
In this blog post, we'll go over some tips for using Xero as a small business owner so that it becomes easier for you to increase your financial awareness and start cash flow forecasting
What is Xero?
Xero is cloud-based accounting software that allows you to easily and accurately track your finances. It has a whole host of features that help any company track its activities, including invoicing, bill management, manual journals, accounts receivable, and accounts payable.
A lot of these tools come with handy automation steps that will have you saving time with every process that you put on there. Xero is an essential part of a lot of operations departments the world over.
What financial reporting can I do in Xero?
Xero has some very basic financial reporting capabilities such as producing Balance Sheets, P&Ls, and basic information on customers and suppliers. There are also some KPIs that it will give you such as actual cash balance.
While each of these is an important tool that any business owner should be monitoring, these are all based on historical figures and only look backward. To really start managing your company the way that you should be, you need to be looking forward. That's where having a forecast, and specifically, a cash flow forecast comes in.
Why do I need a cash flow forecast for my business?
A cash flow forecast is a projection of upcoming cash inflows and cash outflows. Every year, thousands of companies go under because of cash flow issues - a lot of them are even profitable businesses.
Here's an example:
Imagine that you need a new website. You don't want to build it yourself but you've found some experts to build it for you and you love the plan that you've put together. You've looked at your bank balance and feel your cash position is strong to push the button and get going.
Fast forward to the next week though and some debt repayments you weren't expecting and a few bills need to be paid and suddenly the new website doesn't seem as well-timed as it did before.
A cash forecast could have helped you stop this from happening, and it doesn't just mean not doing the things that you want to do. A cash flow forecast in this scenario could have meant rescheduling repayments or negotiating different payment terms with the website builders.
Cash flows are not just early warning systems of cash disasters, they let you prevent the cash disasters altogether.
How can I use Xero to help me with the forecasting process?
Xero is part of a larger cloud accounting software community and has an extensive app marketplace on offer, in fact, they recently hit 1000 connected apps. These apps run the gamut; you have expenses data collection tools like Dext, platforms that give access to funding like Swoop, and a few that are designed to help you with the forecasting process.
These apps will integrate directly with Xero and will pull through your data and will automate the creation of cash flows, 3-way forecasts (we'll come on to that), and more.
(Forecasting aside, as a small business, it is really worth going through the different apps available in the Xero marketplace. There are so many there that will help your business and many of them are even free or operate on a freemium basis. Some of them are even a good deal of fun!)
Which cash flow forecasting app in the Xero marketplace should I use?
As previously mentioned, there are a few different organizations offering apps in the Xero marketplace that support forecasting processes. When it comes to choosing which one is right for you, there are a few things that you need to consider:
Accuracy
How can you base your business operations and decisions on a forecast if you can't trust the information that it's giving you? Accuracy is the keystone of any forecasting software. There are 2 different data sources that need to be looked at when forecasting.
The first is upcoming invoices and bills, essentially any secured business or any outgoing payments that are confirmed. Forecasting based on this information is called "Direct Forecasting".
While this method is passable for a rudimentary, short-term cash flow forecast, it misses out on a lot of transactions that help to create a full picture. What about cash payments? What about interest payments? What about depreciation? This is the forecasting method that most forecasting software offers, it's only half the picture and its accuracy suffers
The other side of the coin is to use trends based on the Balance Sheet or Profit and Loss. This is called "Indirect Forecasting".
This method does catch all previous cash movements and transactions which makes it good for predicting long-term trends. Unfortunately, it foregoes the accuracy that forecasting on upcoming secured business allows you and means that it's not usable as a daily planning tool.
Futrli Predict is the world's first hybrid forecasting software that takes into account both the direct and indirect forecasting methods to give you unrivaled accuracy in both the short and long term.
Information
As important as cash flows are, they are just one piece of the puzzle. A 3-way forecast is one that has projections for the cash flow, the balance sheet, and the P&L. Almost all forecasting software out there that connect to Xero will just give you the cash flow element.
Predict is the only automated forecasting software on the market that produces a fully-linked 3-way forecast. This gives you complete visibility across all 3 areas and allowing you to make business decisions that you can truly trust - putting the fun back into running your company.
Not only that but Predict tries to lift the lid on the black box that is prediction software. Most apps will give you your numbers and then send you on your way. Predict tells you where these figures have come from, why they've been calculated the way that they've been calculated, and which invoices and bills are effected your cash position at any point.
Functionality
Nobody knows your business as well as you do. You can use software to do a lot of the heavy lifting but there is always going to be finer detail that your expert eye is needed to put in. The more tools that you can use to craft your cash flow projection, the better you can make it match the future of your company.
Futrli Predict has a suite of tools to allow you to adjust your predictions that is leagues ahead of the other apps available on the Xero marketplace. You can add your own predictions in a number of different ways such as freestyle and unit-based predictions.
Predict gives you the ability to forecast for complex processes such as payroll unlike never before with its import feature. You can import employee figures, sales pipelines, or custom projections with a simple Google Sheets hotlink connection and see the effect instantly in your forecast.
What should I do now?
If you're using Xero then you clearly care about your data and your finances, so why not take it to the next step and get the certainty and foresight to ensure the safety of your company.
In just a few clicks you can have your Xero connected to Futrli Predict and creating cash flows within minutes.