Cash flow forecasting tends to be something businesses, especially micro and SME's, do on an ad hoc basis. This is mainly because there are so many other jobs which need to be done to get their business off the ground and running consistently and profitably.
Here are 6 reasons you should be using your cash flow forecast on a regular basis:
1. Avoid cash flow problems
Cash flow, and particularly cash flow from operations, is the life blood of your business - ignore it at your peril!
The level of cash flow in your business dictates the decisions you can make and how quickly you can grow your business so it should be monitored and managed on a regular basis. Regular cash flow forecasting will give you an up-to-date view of the amount of cash within your business at any one time and also, what the next period looks like in terms of the flow of cash in and out of your business.
Regular cash flow forecasting can highlight were problems occurred in the past and where there could be improvements made for the future. However, most importantly, a cash flow forecast will give you a good idea of the health of your businesses cash flow at a glance.
Spotting potential cash flow problems ahead of time can save you and your business both time and money. You can make decisions and take actions before things get too bad, ensuring your cash flow is maintained, based on your forecasts.
2. Run different scenarios
A cash flow forecast shows you what your cash flow will look like depending on the numbers you put into the forecast. This means you can play with the different variables that contribute to your cash flow forecast i.e. wages, revenue from sales, supplier costs, taxes, rates and so on.
By changing the amounts for these different variables, you will be able to see what direct affect they will have on your businesses cash flow and at what stage this impact is likely to occur.
A great example of this is the ability to forecast the affect a new member of staff might have on your cash flow over different periods of time. Simply add in the additional wage costs to your forecasting tool and see what happens to your cash flow.
From here you can play with the other variables, such as sales levels, to see what other changes need to be made to offset the additional wage cost to the business.
Running different scenarios in your cash flow forecast can have a number of benefits...
3. Reduce risk
...And the first one is that it significantly reduces the risk inherent in any important or strategic decision.
For many micro and SME's taking on more staff is a big step which needs to be taken at just the right time to ensure the additional cost doesn't cripple the business and eat up all of the available cash.
The risk of making this decision is significantly reduced if you can forecast the affects it will have on your operating cash flow and give you piece of mind if you know what needs to happen to counteract these affects.
Reducing the risk of important decisions such as investing in new equipment or moving premises can give you piece of mind and potentially safeguard both your business and your operating cash flow levels.
4. Better decision making
Another benefit of being able to run different scenarios through your cash flow forecast is that you can make better operational decisions.
Perhaps you have a choice between additional staff or investment in equipment and you aren't sure which decision is going to be most profitable for your business in both the short and long term.
Forecasting the different options will give you the information you need to make these decisions with confidence and assurance that you know what impact they will have on your business.
5. Generate growth inspiration
You didn't get into running your own business because you wanted to stand still; you want to grow your business, make more profit and earn more money - but where do you start?
We have found our customers experience (as a direct result of using our cash flow forecasting tool) that they actually see options they either hadn't thought of or thought weren't possible.
Choosing how and when to start growing your business is a scary and potentially risky step to take in any business but regular and accurate forecasting will help you through this.
By running different scenarios and looking at the affects they could have on your businesses, you will begin to see which options are best for your business, which ones are possible and what is involved in making them work.
Don't forget, organic growth isn't your only options - there are growing funding options becoming available and forecasting could be a way of looking at the impact an injection of cash could have on your business and its growth plans.
6. Demonstrate integrity to investors
And if you are going to go down the route of approaching investors or bank managers, you are going to need to be able to provide evidence of your fiscal management and business acumen.
Finanscapes Online Forecasting Tool allows you to publish your forecasts and plans to individuals to demonstrate your intentions for the cash you are asking for. No more messing about with spreadsheets and formulae that are subject to human error or interference, just a professional, easy to interpret dashboard showing your forecasted plans for their investment.
A cash flow forecast is not just for management meetings, it is for life.