Building a successful Amazon business is not a walk in the park. One of the most important things is to have enough cash flow to sustain your operations.
Amazon businesses should master the art of cash flow forecasting. The latter is an indispensable tool for effective and efficient financial management. It will help you prepare for the stormy days.
With a cash flow forecast, you can have an intelligent and calculated projection of your profits and expenses. But how exactly are you going to do so? Read on as we talk about some of the best methods for forecasting cash flow in an Amazon business.
What is Cash Flow Forecasting?
From performing keyword research to A/B testing, Amazon business owners have a lot on their plate. One thing that you should not miss, however, is cash flow forecasting. It is an essential method for managing business operations, giving you an intelligent outlook of what the future holds, especially from a financial standpoint.
In a nutshell, cash flow forecasting is an estimate of cash flowing in and out of a business within a specified time frame, which is often 12 months. It is useful in predicting the company’s cash position while also avoiding crippling its operations. Plus, it allows business owners to determine what they can do with their cash surpluses to maximize business returns.
Depending on the chosen method, a cash flow forecast can contain different elements. In most cases, it will show four things:
- Expected income
- Expected dates for receiving the expected income
- Expected expenses
- Expected dates when the expenses will be incurred
One of the many instances, when you will need cash flow forecasting, is when applying for a loan. This is handy when you would like financial support for the expansion of your Amazon business. The forecast will show the lender that you can repay your obligation within a specified timeframe.
To add, you also need a cash flow forecast if you are looking for new business partners or investors. A forecast is a tool that will give valuable insights into the future of the business. Hence, it will make it easier for the other party to decide if your Amazon business is feasible or not.
Cash Flow Forecasting Tips for Your Amazon Business
You do not have to be an expert to carry out a comprehensive cash flow forecast of your Amazon business. Below are some of the best things to do to give you an intelligent outlook of what will happen in the future.
Identify Your Goal
One of the first things to do is to identify what it is that you want to achieve from cash flow forecasting. This way, it is easier to find an area where your focus will be. Below are some of the most common goals:
- Liquidity Planning: Amazon business owners should ensure that they have enough cash flowing in to sustain business operations. This is necessary for stock replenishment and marketing, among other things. With a cash flow forecast, you can have better liquidity risk management.
- Attract Additional Financing: Do you want to expand your Amazon business? Are you looking for potential investors? Will you apply for a business loan? In all these instances, a cash flow forecast might be one of the basic requirements.
- Interest Reduction: By having a cash flow forecast, you can ensure that your Amazon business will have enough cash on hand. This means that you will be able to settle your financial obligations on time to prevent incurring sky-high interest.
- Growth Planning: Where do you see your Amazon business several years from now? Manage your expectations with the help of cash flow forecasting. It will provide valuable insights into where you will be from a financial standpoint.
Choose a Forecasting Period
Once you have identified your goal, the next step is to decide how far out in the future you would like to forecast or plan. This has a direct link to your goal. The further into the future you would like to forecast, the higher the possibility that it will be inaccurate.
There are three main types of cash flow forecasting:
- Short-Term Cash Flow Forecast: Most short-term forecasts will last two to four weeks. It has a daily breakdown of the cash inflows and expenses.
- Medium-Term Cash Flow Forecast: This kind of cash flow forecast can cover one to 12 months.
- Long-Term Cash Flow Forecast: This is the most difficult and often most unreliable because of its long coverage. It will forecast earnings and expenses for at least one year.
For most Amazon businesses, the best option is short-term cash flow forecasting. This is also a great choice for other small businesses. It is easier to make estimates because it will cover only a few weeks and you can use your sales in the past weeks as references.
Estimate Your Sales
Sales forecasting is one of the most important components of a cash flow forecast. The main difference between the two is that a cash flow forecast involves more elements, such as expenses. Whereas, in a sales forecast, your focus is your income.
Forecast your Amazon business sales for the period that you would like to cover. For most, it will be one month. Look at the figures from previous years and have a month-to-month comparison to help you determine the anticipated sales.
Several factors can affect your sales forecast. For instance, it can vary on the season and the products that you are selling. For many people, December is a great month for sales because people are shopping for the holidays.
Determine Other Cash Inflows
The cash inflows in an Amazon business are not only from sales it can also be from other sources. Regardless, they should be included in your cash flow forecast. To be accurate, be realistic about your expectations.
One of the most common sources of cash inflow is loans. Especially if you are just starting, you might need to take a loan sometime in the future to finance your operations. When the loan is approved, it is a cash inflow, so you must record it in your forecast.
Speaking of loans, Credit Ninja is one option worth checking. Creditninja.com is a lender for bad credit. The application takes only a few minutes with minimal requirements. You do not need to submit a cash flow forecast, but that does not mean that you can neglect the latter as an essential in your Amazon business. You want to give all your attention to this, so go and seize the opportunity with confidence. However, before taking the leap and moving ahead with your plan, ensure you do the numbers right for the best loan conditions possible.
If you plan to invest more money in your Amazon business, you must also record it as a part of your cash flow forecast. The same thing is true if you plan to sell an asset. More so, you should also record the tax refunds and rebates that you anticipate.
Predict Your Expenses
The next part of the cash flow forecast that you must determine is the expenses of your Amazon business. It should be as detailed as possible to have a precise prediction of what your cash flow will be.
The bulk of the expenses would be for replenishing your supply. Check your inventory to know when there is a need to buy more products. More so, it should also include details about your marketing campaigns, including creating a website, social media marketing, and search engine optimization, among other things. Plus, if you must repay loans and debts, they should also be recorded as expenses.
Consolidate Your Data
At this point, you already have the information needed for your cash flow forecast. It is time to put them together and compute. It is as easy as putting all sales and potential cash inflows and deducting expenses from such. With this, you will have an idea of the money coming in and out of your Amazon business for a specified period.
With the rise of artificial intelligence, data consolidation is easier these days. You can download programs or use business software for effortless recording of your anticipated sales and expenses. The program can automatically input different variables and show your cash flow. Even small Amazon businesses will benefit from such tools as it improves the accuracy of your forecasts while also keeping things as simple as possible.
Take your Amazon business to the next level by utilizing a cash flow forecast. The latter is useful in gaining insights into your business. It will help you predict your profit or loss depending on certain variables, such as projected sales and expected expenses.
The process is quite straightforward. It starts with the identification of your goal and setting a timeline to forecast. Next, you should identify the money that gets in, including sales and other cash inflows, such as loans. Meanwhile, you will need to deduct it from the expenses, such as debt repayments and expenses for supply replenishment.