Why cash flow forecasting is crucial for your business
As identified in Wow’s recent recession-proof survey, a surprisingly high number of businesses are not prepared for another recession. But what really rings alarm bells is the lack of insight the respondents have into their cash flow.
15% of businesses responded that they have less than one month of cash overheads in their bank at any one time, and 11% of businesses have no visibility at all into how much cash they have. More worryingly, 15% of business owners are living on the edge of delving into their personal finances to stay afloat.
The first step towards resolving these issues and investing in good governance is maintaining a cash flow forecast. This used to be an extremely time consuming and manual task, but now with cloud-based tools such as Float that can pull data directly from Xero, it is incredibly easy to do.
So why is cash flow forecasting so important?
How forecasting your cash flow can help your business
It is part of the infrastructure you need to grow
Whether or not you are worried about cash, setting up and maintaining a cash flow forecast should be a cornerstone of your reporting package. It’s part of the infrastructure your business must have in place to grow sustainably.
Before you rush into buying more office space or making a new hire, you should always run a scenario to model how that action would impact your cash. Understanding whether or not plans are feasible in cold hard cash, rather than sometimes unrealistic profit and loss, is crucial to minimising risk.
Identify cash gaps and surpluses before they happen
Forecasting your future bank balance helps you see well in advance when you may have a cash shortage that could spell disaster for your business. It can also give you enough time to take action to avert a crisis, enabling you to access better loan rates or tighten up payment terms to bridge the gap. As the saying goes, forewarned is forearmed.
On the reverse side, if you are forecasting to have a large lump of cash sitting in your bank account in three months, knowing this ahead of time will allow you to explore options to reinvest it in your business to drive growth.
Gaining trust from stakeholders
Investors and financing providers are not as bogged down as business owners with day to day firefighting, which means that they tend to think in terms of the big picture. They want the leaders of the businesses they invest in to do the same, to ensure they maintain a clear idea of the future. Providing stakeholders with a regular cash flow forecast including best, average, and worst case scenarios will demonstrate a level of awareness that instills confidence and trust and will make it easier to raise more investment.
Get on top of accounts receivable
By creating a cash flow forecast that takes invoices and bills into account, you’ll be more easily able to pinpoint who is consistently paying late and use this information to enhance your credit control process. You could even go on to model different payment dates on overdue invoices to see the true effect of late payments on your cash flow.
Track your spending and staying within budget
Being able to scrawl a vague idea of cash in and out on the back of a napkin is all well and good, but do you know every time you’re in danger of dipping into the red from one late payment? Are your guesses always right?
Looking at a profit and loss or a balance sheet will give you a snapshot of what is happening right now, but it won’t show the future in terms of the cash you will actually have. In other words, it just isn’t ‘real.’ With a cash flow forecast that has been updated with actuals, you can compare your best guess to what really happened, which can be invaluable information.