As a start-up, micro business or SME, you will have been told that it is important to have a cash flow forecast. But why?
This blog post looks at all of the important issue around cash flow and why forecasting can really help you to grow your business, make more money and better decisions and avoid financial failure.
Why is cash flow important?
Firstly, let's take a closer look at why cash flow is important to a business. Put simply, a cash flow forecast is a forward-looking view of the cash coming into and going out of your business at any one time. But why is this important?
This may sound like an obvious question but you would be surprised at the number of start-ups we hear about who think that profit and cash flow are the same thing - they aren't!
At the end of each month or at the end of your financial year, you will know if you have made more money than you have spent but what about on a day-to-day basis. Good fiscal management means always having a surplus of cash within the business to cover unexpected expenses, disasters (which are often unforeseen) and can help you take advantage of unexpected opportunities.
However, with a negative cash flow, i.e. no surplus cash within the business, you will quickly run into problems including paying bills, staff, suppliers and not being able to invest in the business through marketing or technology.
This is why it is important to understand your cash flow.
What is a cash flow forecast?
So now we know how cash flow works and why it is important you can look forward to managing your future cash flow.
A regularly updated and reviewed cash flow forecast can make the difference between success and failure for many businesses, not just start-ups.
A cash flow forecast is a forward-looking view of the incoming and outgoing cash of your business each month over a fixed period of time - normally a year. The simplest way of seeing what your cash flow will look like is in a graph. Finanscapes have built a simple dashboard into their cash flow forecasting tool to ensure it is as simple and easy to interpret as possible.
Your cash flow forecast will indicate when you are going to experience positive and negative cash flow giving you the opportunity to put precautionary measures in place now to avert any crisis'.
Your forecast will also give you an idea of the amount of cash you are likely to have available at any particular time indicating possible windows for growth and investment. This will help you to make plans for the future.
How to calculate a cash flow
We have written an extensive article on How to Calculate Cash Flow which explains what numbers you will need to hve at hand and how to use them to calculate an accurate cash flow.
We have created a simple 4 step process for calculating your cash flow so you can understand the numbers in your cash flow forecast.
Once you have these numbers and you know how to calculate a basis cash flow for the present, you can start using a forecasting tool such as our to forecast your cash flow into the future.
The advantages of having a cash flow forecast
By now, I'm sure you have realised there are almost endless possibilities once you have a cash flow forecast to hand.
It allows you to:
- See your options clearly and at a glance
- Make better decisions based on the figures and not a hunch
- Remove the risk from decision making and business strategy
- Make growth plans
- Improve relationships with suppliers, staff and customers
- Dedicate more time to other (more fun) tasks
- Foresee problems before they happen giving you the chance to correct them before it costs money!
- Build investor confidence
For more information about any of these advantages and how cash flow forecasting could be giving your business a competitive advantage, read our blog 10 Advantages of Cash Flow Forecasting.
The Finanscapes Forecasting Tool allows you to forecast both your cash flow and profit and loss increasing your chances of start-up success. You can compare scenarios and plans to see which ones will be most profitable and leave you with the best cash flow.
And what if you need funding for your idea or start-up? Forecasting is an essential part of any loan or financing application and with the publishing functionality Finascapes offers, you will have a professional looking forecast to show bank managers, mentors or investors at the touch of a button.
Start your FREE trial now and see where your business could be going!