Why every business should have a cash flow forecast

Many business owners can see creating a cash flow forecast as a complicated, time-consuming affair. However, it doesn’t have to be. There are ways you can make the process simpler and carrying out the cash flow forecast now can save you precious time and money in the future. A cash flow forecast is potentially one of the most useful tools a business can have to stay on top of its finances. Here we share why every business should have a cash flow forecast.

Whilst some may think that cash flow forecasts are only necessary for larger companies that have more extensive incomings and outgoings, this is far from the truth. Having a cash flow forecast is something all businesses can benefit from, no matter how big they are. Cash flow forecasts are more important than ever now due to the challenging times businesses have faced recently.

What is a cash flow forecast?

Let’s start with a definition of what exactly a cash flow forecast is. Cash flow is a term used to describe the money that comes in and out of the business. A cash flow forecast, therefore, is a prediction of this cash movement. It predicts what you are planning on paying out and how much you are expecting to receive. This can be done from any period in the future, whether it be a month in advance or much longer. Of course, it becomes harder to do and potentially less accurate the further in the future you create your cash flow forecast.

The Benefits of having a cash flow forecast:

Keep track of overdue payments

Having late payers can have a major impact on your cash flow. This is one element that you should keep a handle on. Even one late payment can lead you to have diminished levels of cash which can quickly have a domino effect. Creating cash flow forecasts allows you to see if you have certain clients that are consistently late payers. If you do, you can monitor what impact this has on your cash flow and put the necessary actions in place. For example, you may need to look for an effective method of credit control such as a debtor chasing service or software.

Plan for future cash gaps

Inevitably you will find yourself with gaps in your cash flow now and then. Whilst this can always be a terrifying prospect, using effective cash flow forecasting means you will be able to see these potential gaps much further in advance. This will give you adequate time to prepare.  Knowing you will be short of cash at certain times of the year, you will be able to put plans in place to ease this disruption. For example, you could look at reducing payment terms, or sourcing alternative methods of cash to make up the gap such as a loan.

Managing Excess Cash

Whilst this rarely happens, there may come a time that your cash flow forecast suggests that you will in fact have surplus cash. Whilst this does not necessarily mean you have excess profit, it tells you when you have the cash available. This is perfect for planning when to pay off any loans, or when is the best time to invest in a new area of the business.

Know when and where your money is

You will quickly get a better understanding of where your money is currently being spent. This information is not shown on a profit and loss statement, therefore it is great that you can see it in your cash flow statements. From this, you can easily identify the areas that are not getting enough of a cash boost and which areas you need to cut back on.

Understand if you are on track to meet targets

Targets are often created for the amount of revenue a business is trying to make. Cash flow forecasting, when done effectively, should help business owners understand when they should meet these goals. Whilst the cash flow forecast is obviously a prediction and not fact, you can use it to understand roughly when your targets are met. By looking at previous months and how accurate your forecasts were, you can see if you are on track and when you can realistically reach your revenue goals. If your forecasts are regularly off, you know you need to readjust your forecasts or the timeframe of your goals.

Cloud for cash flow forecast

We know that business owners have a lot of difficult decisions to make daily. Therefore some business owners may struggle to find time to complete their cash flow forecasts. Luckily, the growing popularity and complexity of cloud accounting software has made the process as simple as it’s ever been. Using online solutions to monitor your online cash flow such as Xero or Quickbooks can help alleviate the stress, save time and allow business owners to have a great grasp of their future cash flow.

Plan for the future

The future is unknown and whilst no one can predict the future of your business. Creating efficient cash flow forecasts can take you one step closer. Once you start using your cash flow forecast, you can see the impact on your cash flow from certain scenarios. This is a crucial part of business planning. For example, if you are planning to expand your business overseas, you can forecast your cash flow and see if this is a feasible option, all before the money has been spent and the risk taken. You can even use forecasting to help you secure future financing with investors or banks. Use your forecast to test different scenarios and see what the outcomes will be. Whilst these are not certain, they can help steer you in the right direction with some level of confidence.

Whilst you understand your products and services extremely well and understand the margins of each product, this is not enough. You need to have a thorough understanding of how much cash you have in your business at any one time. Whilst you may be asset rich you may be cash poor and this can have detrimental and impact your business, especially in the short term. Therefore you need to know how much cash you have in your business at any time. Having a forecast is vital to all businesses, so we definitely recommend you create one if you haven’t already. Not sure where to start? Our team are here to help so please get in touch.