LETS TALK CASH FLOW FORECASTING

Our blog last week looked at how businesses can manage cash during a crisis and one of the recommended measures is a preparation or review of your business’ existing cash flow forecast.
Cash in business is what oxygen is to human beings, which means, without cash a business cannot survive. The recent crisis has revealed that most businesses do not have sufficient cash resources to survive during a crisis. In actual fact, some businesses have no clear visibility at all on how much cash they have or how much they need to survive on a monthly basis.
In order to deal with this issue, the first thing required is to maintain a good cash flow forecast. This is a different exercise to analysing your monthly management accounts. The income statement or balance sheet will only give you a snapshot of what has happened and what is currently happening in your business, but it will not show you the future cash needs of your business.

So what is cash flow forecasting?

A cash flow forecast is a lens on your cash balances. It is a model that is designed to identify early warning signs to the future of your business’ health. Just as a doctor will use a stethoscope to check if you still have a pulse in your heart and you are still getting the oxygen you need to survive, you as a business owner will use your cash flow forecast to check the survival status of your business.
 

Why is cash flow forecasting important?

Decision making
Modeling scenarios on a cash flow forecast will enable you to see the impact of your decisions prior to taking action. For example, if you are planning to purchase new equipment, move into new offices, or hire additional staff a forecast will enable you to see the impact of this on your cash. If the decision will prove to be strenuous on available cash, then you will be able to explore other options such as leasing instead of buying. A cash flow
forecast will assist in minimising risk caused by business decisions that are not feasible.
Early identification of gaps
A cash flow forecast will assist you to see a future cash gap that could cause a disaster for your business. If you forecast well, you should have enough time to take action to deal with a crisis. This could be negotiating better loan rates or tightening your payment terms to bridge cash flow gaps.
Gaining the trust of your stakeholders
Stakeholders such as shareholders or funders are not involved in the daily operations of your business. From time to time, you will be required to provide these stakeholders clarity on what the future of your business looks like. These projections will have to include a cash flow forecast. From it, they would draw their conclusions about the business and will increase trust
and accountability. This will increase your chances of getting funding when required.
Getting on top of accounts receivable
This is not an issue if you are a business that only deals in cash, however, if you offer extended payment plans, a cash flow forecast will assist in assessing how quickly your customers are paying their debt to you. You will also identify customers that are frequent defaulters which will allow you to improve your credit control processes and get paid faster.
Getting on top of your budget
As a business, you have your goals and targets that have been set out in your budget. Cash flow forecasting will enable you to see if those goals are still attainable and when they will be attained. Your forecast model will allow you to see the impact of your budget, from it you will be able to determine whether you have under or over-budgeted. Seeing the movement of
cash on your forecast will improve the accuracy of your future budgeting.
Cash flow forecasting can be time-consuming, however, it cannot be ignored. Cloud-based tools can make this task much simpler than it used to be.

Look out for our blog next week where we will dive deeper into how you can ensure that your cash flow model is accurate. If you would like to talk to us more about your business, please contact us here.