Cash flow forecasting is one of those things can slip down your priority list as a business owner, often due to a blinkered focus on finding ways to improve profits.
But the thing is, letting your cash flow do its own thing and not taking the time to forecast what it will look like, can leave your business without any cash to fund operations – the last thing you want, right?
In this blog post we explain why cash flow forecasting is such a critical area to maintain focus on as we start the calendar year. We hope it prompts you to remember to always keep at least one eye locked on cash flow.
It’s important to recognise that your business’ cash flow is the lifeblood of your business – without keeping it sufficiently well stocked, the chances of your business surviving don’t look good.
For instance, you could finish off a fiscal year displaying a great profit line, but hey, that doesn’t mean that you have any actual money on hand to fund your functional operations, and/or to grow the business.
As receipts can often tail sales, payments can be demanded by suppliers (they could even cut you off if you don’t pay up on time) and you could be faced with dealing with a whole lot of loans that you can’t pay. Stressful, and not exactly a recipe for success.
Effective cash flow forecasting allows you to avoid these problems, means you’re prepared for these situations and also means that you can continue in your business while you wait for the profit that’s written in your books, to become a reality.
There are other related reasons to make sure you’re across your business’ cash flow forecasts – here’s five to get you started.
For your business to grow, you need to be able to afford to build your infrastructure to support the growth – add staff to your team, move to a larger location, upgrade your equipment, buying additional stock… You can’t do any of this easily when you have short-term cash deficiencies.
If you know your cash flow forecast intimately then you can plan your payments – not only paying them, but also on paying them on time, every time.
When your cash flow is forecasted properly and you are aware of the times in the year that your cash reserves fluctuate, you then have time to spot any trouble before it happens and take actions to course correct.
Related to this, a cash flow forecast is often a must when going to lenders or banks – it shows them that you’re prepared and can avoid nasty surprises.
If you want to put some money aside you need to know what’s coming in the future – if you don’t have excess cash flow then it’s going to be difficult to save. If you have a plan then you know what you’re dealing with, you know how much you can save, and if your forecast doesn’t show that you’ll have cash to tuck away, then you’re aware that things need to improve in order to get yourself into the “saving zone”.
Look at it this way; if you don’t know what’s coming then you can’t prepare and you’re not in control of what happens.
Sure, there are things in business that you won’t have control over, but planning and forecasting your likely future cash flow is something you can do. And it will give you control over an important aspect of your business.
Doing simple things like getting accounts receivable paid earlier can have a positive impact on cash flow over time, e.g. if payments come in 14 days earlier, then today you have the same amount as you would have had today, as well as what you would otherwise had 14 days from now.
Now that you know cash flow forecasting is crucial on your road to business success – are you ready to get started?
It’s an important step and its one that’s best done with expert advice. Get the help of financial advisers and accountants that can provide you with accurate forecasting and take the difficulty out of the process for you so that you can concentrate on the fun parts of business ownership.