How cash flow forecasts help small business
There is a lot of truth to the idiom, “failing to plan is planning to fail”. Forecasting or predicting what is going to happen with your business’s cash flow is essential for any small business to help you plan ahead and ensure you will have enough cash flow to continue operating and growing.
Benefits of forecasting
Forecasting helps remove the element of chance by giving you a little glimpse into the future. External stakeholders such as banks may demand a forecast at regular intervals, especially if you have a bank loan. But even if you aren’t required to produce one by a bank, preparing an annual cash flow forecast will give you important information about how your business is operating and should be considered an essential part of your financial discipline.
A cash flow forecast will identify potential shortfalls in cash well in advance -think of it as an early warning system. You obviously need to make sure you can pay suppliers, employees and other expenses in order to keep your business up and running.
Your cash flow forecast will also reveal where there may be upcoming issues, such as sudden cash deficits in a particular month. There may be many reasons for this and having the forecast will enable you to analyse what those reasons are likely to be, such as where you have overspent or over committed.
Your business may be in need of a cash injection at a particular time, and the forecast allows you to see when you might need to obtain a loan or other kind of finance so that you have enough working capital to fulfil your objectives and obligations.
You may decide to change how you run your business in terms of marketing or expenditure, or increasing prices or removing non-performing staff. Unfortunately, sometimes the cold hard truth is that your business is simply not viable and you’ll be able to see this and reassess your next steps.
Forecasts should be seen as vital part of your business decision-making process, as they give you information to help you make big decisions, such as taking on more staff, changing prices or suppliers, tendering for a large contract, or moving premises. Accurate forecasts enable you to see the impact on your cash flow before you commit money to a decision. Undertaken on a regular basis, it gives you the knowledge needed to make better informed decisions.
Identify key relationships
Relationships with suppliers and customers can benefit from your forecasting, too. It may be that your forecast allows you to identify those suppliers that are crucial to your cash flow, allowing you to invest time and effort into strengthening your relationship with them. The forecast can help you ascertain how quickly customers are paying their accounts and which customers are always late to pay and possibly not worth keeping.
Having unforeseen problems with cash flow highlighted in advance gives you the opportunity to tackle them and steer your business in a direction to avoid problems or take action to reduce the impact they will have on your business. This is of critical importance to small businesses which typically don’t have the large reserves of cash to fall back on in lean times.
It is impossible to control everything that happens in relation to your business, but understanding what the likely impacts of events or circumstances are will at least give you the chance to take action to be able to deal with such situations. Forewarned really is forearmed.
Prepare your forecast
Once you have been in business for at least a year it is fairly straightforward to prepare a cash flow forecast as it will use your previous year’s actual financial behaviour to predict what is likely to happen going forward.
Quality accounting software makes the job of cash flow forecasting very easy, with most of the well-known accounting software brands building forecasting capabilities into their products. There are also dedicated financial forecasting software packages available on the market.
Cash flow is often described as the lifeblood of all businesses, especially small businesses, and cash flow forecasting is a vital business tool that can help you manage your cash flow so you stay afloat and your business succeeds.