The Importance of Forecasting Cash Flows
Failing to Manage Cash Flow Can Lead to Business Failure
Jul 11, 2009
If a business does not forecast cash flows it runs the risk of having no money in the bank. Without money it cannot pay anyone. Not the staff or the landlord, nor the utilitiy companies or the tax authorities. In the same way that a car cannot run without fuel, a business cannot run without cash.
Small business owners are specialists in their field, such as electricians, plumbers, writers or retailers. Many do not find it easy to work with money and spend too little time on cash flow planning. It is often left to chance whether there will be enough in the bank at the end of the month.
That might not be too much of a problem for a sole trader working from home. But it becomes a major risk for a small business renting premises or employing staff. These are the businesses that need to have good cash flow forecasting processes in place if they are to survive in a downturn.
The Importance of Cash Flow Forecasting
Even a profitable business can suffer cash flow problems. Major customers might take a long time to pay their bills. Or the business might spend a lot of money on new equipment or stock, tying up capital that will be released through sales over a long period of time.
Forecasting three or six months ahead will show whether there is going to be enough cash in the business to keep it going, or whether new sources of cash need to be found.
How To Forecast Cash Flow
A cash flow forecast should show the business owner how much money they are going to have at the end of each week or each month. It takes into account all the cash coming in and the cash going out.
The forecast begins with the opening balance - the cash available today, either in the bank or in hand. Added to that is all the cash coming in during the next week/month. Then the payments out are to be deducted. This leaves a figure which is the predicted balance at the end of the week/month. The same process is repeated over and over to build a forecast for several weeks or months.
It is important not to overestimate the amount of money coming it. Better to be cautious, particularly if the business is operating near the edge of its financial reserves. When forecasting payments it is important to remember some costs are paid monthly, or quarterly, or even annually.
The Result of Cash Flow Forecasting
Forecasting is simply looking ahead at what the near future might hold. This enables business owners to make good decisions about future finance arrangements. They might need to plan to extend their overdraft or take out a loan. Or they might be able to consider a reduction in borrowing, or have the funds to finance further investment.
Cash flow forecasting is always a good investment of time, and can make the difference between a business succeeding or failing.
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