Second – set a goal
From your notes, set yourself a target of savings or income improvement. For example, you can aim to increase profit by $600 per month by:
- Increasing sales by $200
- Reducing subscriptions by $100 by removing an old subscription you don’t use
- Calling the bank and negotiate a better credit card/bank fees rate – saves $50
- Calling a key supplier to get a better rate – $250
Now that you have more insight into past transactions, it’s a great time to work out a monthly cash flow forecast or a budget. A budget focuses mainly on profit, while a cash flow forecast looks at money coming in and out from all sources.
A great starting point is simply taking your income and expenses from the previous year and dividing equally into 12 months.
Expert tip for Xero users: Go to Reports / Accounting / Cash Summary. Enter the information for Date, Period, Compare With (see below), and click Update. Export to Excel and you can use this as your starting point.
Next, critically review the income and expenses on a line-by-line basis and adjust each month up or down where needed.
- Your income may increase or decrease during holiday periods, or with the change in seasons?
- Think about the timing of expenses – memberships may be once a year, ACC levies are usually due in July/August, rates are paid four times a year, and your power bill is likely to be higher in winter
- If you plan to purchase assets, obtain a loan, or pay off a large amount of debt, factor these into your cash flow forecast
Entering your financial information into Xero’s Budget Manager will make the next step (Monitoring) very simple.