Why You Need to Forecast Cash Flow
Making sure you have the cash to stay afloat is absolutely crucial for any business, as cash shortages are the primary cause of bankruptcy. However, many business owners ignore cash flow forecasting because it is viewed as either a burdensome undertaking or an unnecessary distraction. So why bother doing it?
#1. Prepare yourself for external changes
What would happen if the government grant you were counting on is delayed? Or if a supplier increases their pricing? Any external change may directly impact your cash flow.
Looking to the future will help you unpack the repercussions of such a change, and make contingency plans. This information will help you make crucial operational decisions to keep your business profitable.
#2. Spot and avoid cash shortages
You need to be able to act quickly and effectively to avoid a cash shortage. Maybe you’ve paid for materials before your client pays you, or maybe you’ve had to invest in inventory or human resource in order to complete a contract. Forecasting your cash flow will help you understand whether you can get through the cash crisis, or if you need to get short term funding or make cut backs.
#3. Can you afford to invest in your business?
Many business owners with a cash surplus are keen to invest back in the business. But don’t be too hasty. Having cash in the bank today does not tell you how well covered you are when it comes to the coming weeks and months. You’ll need to run a cash flow forecast to see whether you are in a good position to invest that cash back into the business.
#4. Plan for the future(s)
Are you thinking of growing your sales team, or expanding your office but you’re not sure if you can afford it? Or are you looking to make a withdrawal to buy that new house? In any different potential ‘future’, you need to properly plan where and when your cash is going to understand whether it’s doable.
#5. Maintain good relationships with your suppliers
We’ve all been in a position where we want our suppliers to go the extra mile for us. Maybe we need something delivered yesterday. Maybe we’re asking for a value-add that’s slightly outside the original scope. Whatever it is, we’re only going to get favours from our suppliers if we have a good history with them. Being a good payer is a big part of that.
#6. Track spending and stay in budget
Could you jot down your forecast on the back of a napkin from the numbers in your head? Great. How about tracking performance towards that forecast? Will the napkin alert you if you’ve gone over-budget?
Properly forecasting your cash flow will better prepare you for the future and for serious discussions with your stakeholders. You need to know when you’re over or under budget so you can adapt your forecast moving forwards.
#7. Pay your staff and suppliers on time
Maintaining a positive organisational culture and strong relationships with your suppliers will require you to be a responsible and timely payer. Forecasting how much cash you will have in the bank will show you whether this is possible, or whether it’s time to manage expectations with employees and suppliers.
#8. Avoid trading while insolvent
If things are going downhill and you’re becoming insolvent, you will usually have a legal duty to stop trading. A company becomes insolvent when it can no longer pay its bills, or when its liabilities outweigh its assets.
How do you forecast your cash flow?
You can either 1) ask your accountant for help creating one, 2) do it yourself in Excel using a template, or 3) use a cash flow forecasting tool like Float. Getting a clear picture of where your hard-earned cash is going isn’t that hard, and it’s very much worth it.