Cash flow forecasting: Is it really worth the effort?
If you’re forecasting your business finances just to please your bank manager, you’re missing out on a valuable management tool – one that will put you in a stronger, more confident mindset now and set you up for more success in the long-term.
Forecasting isn’t reserved for large multinational corporations. It’s important for any business and especially small businesses. You can use forecasting as a simple way to keep control of your money and get ahead of any problems quickly before they pose a real threat.
How do we define a cash flow forecast?
Simply put: a cash flow forecast is a plan that shows how much money your business expects to receive, and pay out, over a given period of time. It will generally cover how much you expect to earn in sales, how much you expect to spend in day-to-day running costs, and finally how much you expect to receive from other sources (such as a bank loan) and pay for other costs (such as buying new equipment).
Why do you need it?
Knowledge is power, and clarity gives peace of mind armed with the knowledge of a cash flow forecast you’ll be able to start digging deep into the full potential of your business. You may have been toying with the idea of developing a new product or service, outsourcing some of your day-to-day tasks, or recruiting a new member of staff. Knowing your current and projected figures will help you to make smarter and more informed decisions. Equally, your forecast could highlight the possibility of running out of cash and prompt you to look into your borrowing options to support your future goals.
How do you do it?
Before you look at cash flows, you need an idea of how your business will perform in the short to medium term, and so the starting point is usually a profit and loss forecast or budget. From this, you can then plot when you expect the resulting cash flows to hit your bank. So if you expect your customers to pay you in 30 days, you can plot these in flows accordingly. You then do the same for your out flows, such as supplier payments, wages, VAT bills, and tax bills.
We did a “rough and ready” video on how to do a really simple forecast which you can view at the bottom of the page.
There are also some excellent cash flow tools on the market to help you. We particularly like:
A user-friendly app which integrates with many accounting platforms. It gathers information automatically which means you don’t have to spend time manually inputting data.
Fluidly connects with your Xero account to produce a real-time cashflow forecast that requires no modelling whatsoever. Fluidly’s cash flow forecast provides a powerful look into the financial future so you can see clearly what’s coming up.
What happens if I don’t do it?
Making good decisions determines whether your company flounders or prospers, and in order to make sound decisions, you need good information—particularly about your financial situation. It isn’t enough to be profitable. To survive, your business should have the cash available when employees, landlords, suppliers and other vital partners need to be paid. To do that, you must be able to effectively forecast and manage cash flow.
Yes, it’s possible for you to ‘tick over’ without an accurate forecast. But it’s a dangerous way to run your business. For minimal effort and investment why not give yourself the best possible chance to thrive?
Interested in finding out more about cash flow forecasting?
We’re here to help. Contact us today.