What is The Importance of Having a Cash Flow Forecast?

21 January 2015

Does your business have enough cash to survive?

Cash is the lifeblood of any business, particularly for small enterprises and start-ups. It's easy to get hung up on profit but there's great danger of business owners not putting enough focus on cash flow.

Having an accurate cash flow forecast in place can help you foresee potential problems which may arise in the year ahead, and it can help businesses make important decisions about their future.

To put it simply, businesses need cash flow in order to keep themselves solvent. No cash means bankrupcy. This is why planning and cash flow forecasting is so important!

If your business runs out of cash, and it isn’t able to obtain any new finance, it will become insolvent. There is no excuse for businesses not to see a cash flow crisis coming, especially given how easy it can be to create a cash flow forecast.

Here are just a few key reasons why cash flow forecasts are important:

A positive cash flow is essential if you want to generate profit. You need enough cash to pay your employees and suppliers so that you can produce your goods and services. It's the sale of those that (should!) generate a profit.

A good forecasting tool will produce both a cashf flow forecast and profit forecast for you in one go. The best (like Finanscapes!) do much more too - showing you things like margins and break-even points, all from the same set of information you provide.

Be disciplined about financial planning

Financial planning is imperative; you need to be disciplined and regimented with knowing the amount and when money is coming in and going out. If your cash flow forecast is robust, your business will be fit and able to deal with any challenges or issues that come your way.

Does your bank need to see regular cash flow forecasts?

They won't need to see it regularly, but if you find yourself needing a loan your bank will request a detailed cash flow forecast before they even consider giving you any money.

If you are looking for ways to improve your operating cash flow then check out this article.

Spot the signs of cash flow problems

The most important part of cash flow forecasting to remember is to understand what you're looking at and address any cash flow issues that you may have. Cash flow problems won't go away on their own. Depending on the magnitude of the cash flow problem you may need to take different measures - ranging from "tightening the belt" to taking out a loan. Whatever the action necessary, having your forecast ready and easy to understand will make this process much, much less painful.

If you’re still profitable after having cash flow difficulties; you may just have to tighten up your credit control measures, reduce your costs or perhaps seek advice from the bank. More serious and regular cash flow predicaments will require more drastic action.

The likelihood is, if you face cash flow problems frequently, one day your luck is going to run out - so tackle issues early and take the stress down a notch!

A cash flow forecast (or any other kind for that matter!) is only as good as the impact it has on your decisionmaking and your success. A spreadsheet might look free, but if it's not highlighting the numbers you need know it's going to cost you a fortune in the long-run.

What is the worst case scenario?

Realistically, the worst case scenario if you cannot grasp good cash flow management is that your business will close its doors. A lack of positive cash flow and sufficient money to finance your business is the most common reason why businesses fail. This is obvious when you think about it - but it's really bad news. If you are a sole trader you may face personal bankruptcy. On the other hand, if you are a limited company, your personal liability for the debts will be limited (although many bank startup/ small business loans require a personal guarantee from the director, meaning that debt is yours). This all sounds very scary, but if you're smart, disciplined and take the right steps you shouldn’t get to this stage.

Although you're more exposed to your business's debts as a sole trader, those bank loans will probably have to be repaid by you personally even if you're running a Limited Company.

It doesn’t have to be difficult

If you find the idea of planning your cash flow forecast difficult or perhaps daunting, take a look at these tips to take away the fears:

Step 1

Make a list of all of the payments that you are planning to make over the next year. For example: Equipment, Bills, Stock, Employee Wages, Rent etc. To make this easier you can break this down into months - this will give you a good level of detail and you should be able to see clearly where your business could fall into trouble.

Step 2

Now that you have your costs, you will want to know what money is coming in to the company. So next, create a sales forecast and list all of the money which will be entering the business over the same period. Remember, the most important thing about cash flow forecasting is to be realistic!

Step 3

Subtract your outgoings from your incomings and you’ll see how much or how little money you should have available at any time. This will also give you a monthly and annual forecast of the state of your cash flow. It will also help you see which months are most likely to generate a higher income (where you can build-up a bit of a war-chest) and which months you could be in danger.

Of course, your cash flow forecast may be slightly more complicated than this, but this is a great place to start if you are a new business owner. The important thing is to act quickly. Regular cash deficits can really harm a business.

Sooner or later you'll realise there's no sense re-inventing the wheel and hacking your way through error-prone spreadsheets. Check out Finanscapes - it's the only independent online software which makes the process simple, easy and painless. (And you can get a long way just during the 3-day free trial!).

If you are hoping to start 2015 off right then good cash flow management should be your priority. Growth requires good cash flow and having a positive cash flow forecast makes your business a good investment!

Share This Article

Twitter Facebook Google Digg Reddit LinkedIn Pinterest StumbleUpon Email

FREE Forecasting Software

Try Without Registering