Having enough cash to continue operating is a hot concern among most business owners. And it should be, as a lack of cash is the number one reason why businesses go under. As famed business guru Peter Drucker once said, “entrepreneurs believe that profit is what matters most in a new enterprise. But profit is secondary. Cash flow matters most.”
With cash flow being so important, failing to forecast accurately can put your business in jeopardy, making it vulnerable to future cash pitfalls. However, if you’re still not convinced your business needs a cash flow forecast or if you’re not quite sure what it really involves, here are the crucial benefits a cash flow forecast can have for your business.
1. Always know how much cash you’ll have in the bank
A cash flow forecast takes all your future payments and transactions into account, mapping out when and how much money will leave your business up to 3 years in the future. Rather than showing when clients’ invoices are created, a cash flow forecast shows when invoices will actually be paid, ensuring your future cash predictions are as rock solid as possible.
2. Anticipate cash surpluses and shortages
Knowing how much cash will be on hand in the coming weeks, months, and years, your business will be able to see and plan ahead for the times when cash will be tight – maybe you need to cut operating costs to make up the difference or perhaps you need to wait to hire that extra employee until next year.
On the flip side, you’ll also be able to predict when your business will have cash surpluses, helping you decide how you’re going to reinvest this in your business.
3. See how hypothetical scenarios will affect your cash flow
Another key benefit of having a cash flow forecast is that it enables you to see the direct effects of making certain business decisions on your cash flow. With an accurate cash flow forecast, you can factor in scenarios like hiring an extra employee, a 10% sales decrease, or the cost of moving offices, and see if your business will be able to survive these situations.
4. Monitor how much you’re spending and keep to your budgets
A cash flow forecast allows you to see how your budgets stack up against your actual spends over time. You can see if your projected budgets are on track or whether you need to consider adjusting these amounts to make better predictions in the future. Your forecast will also raise red flags for vulnerable areas in the business that may be overspending or using funds inefficiently, enabling you to readjust accordingly.
5. Know when you can take drawings
Whether or not one of your key motivations for starting a business was to reinvest and make more money, a cash flow forecast will help you maximise the drawings you and your partners can take in while continuing to deliver on your commitments and keeping a safety cash cushion. Simply using a P&L budget won’t provide you with a clear enough view of the cash that will be in your bank account, which could be dangerous in the long-term.
6. Ensure you can pay your suppliers on time
Paying your suppliers on time can make or break your reputation – not making or being late on your payments could prevent your suppliers from wanting to work with you in the future. With a cash flow forecast that predicts how much money will be on hand at a given time, you can confirm that you’ll be able to pay by the due date or whether you need to get in contact with your suppliers asap. In an ‘I’ll scratch your back, you scratch mine’ kind of world, ensuring you pay your external suppliers on time could increase the likelihood of them giving you back favours in the future.
7. Witness the effects of late payments and credit control
With a cash flow forecast that factors in invoices from your clients and bills from your suppliers, you can more easily see who is consistently late with their payments. Using these insights, you can improve your credit control and see what culprit clients need to be chased so that you get paid on time. For even more detailed forecasting, you can model different payment dates for unpaid invoices, using them to see the consequences of these late payers on your future cash flow.
8. Easily share business data with stakeholders and advisors
Cash is one of the key resources, if not THE key resource, your business needs to achieve its goals. As a result, your business’s cash position is of vital importance to a variety of stakeholders and advisers, such as board members, potential investors, and your accountant. Without an accurate and up-to-date cash flow forecast, your advisers won’t be able to provide you with the advice or guidance that is needed to work towards business success.
Read this article for more on why a cash flow forecast is critical for your advisers.
9. Reduce risk with more informed decision-making
Overall, a cash flow forecast is a highly useful business planning tool that enables you to see into the future and predict how much cash you’ll have on hand at a given time. With the knowledge provided by a cash flow forecast, you’ll have the data to back up and inform the future decisions you make and reduce the likelihood of their failure.
With the rise in popularity of cloud accounting software, creating a cash flow forecast couldn’t be easier. You can make one yourself in a spreadsheet using this template, or if you use Xero, you can export your Cash Summary into a spreadsheet and use it to make your forecast.
If the pain of keeping your forecast up-to-date becomes too much, consider using apps like Float which integrate directly with accounting software, making forecasting quick and easy. But as business advisers, forecasting and budgeting is our speciality here at Valued.
This is a guest blog by Float Cash Flow Forecasting, an add-on for Xero and winner of the AccountingWeb Practice Excellence award 2017 for forecasting, planning and analysis. For more information visit floatapp.com.
This blog post first appeared on our old website.