Why every business needs a cash flow forecast

People choose to work for themselves for many reasons. They like to be their own boss or want the freedom that comes with being able to set their own path. But running your own show, especially once you take on staff and grow from a single operator to a small and medium business brings with it many challenges. One of those challenges has always been cash flow.

We have all heard the statistics that 9 out of 10 businesses fail due to poor cash flow. Cash flow is the life blood of a business and without it the business will die. If it is that critical why don’t most businesses manage their cash flow like they do other operations in the business like marketing or purchasing?

What is a cash flow forecast?

Simply, a cash flow forecast measures the amount of money (cash) coming into a business, against what goes out and when. It is commonly prepared for the year in advance and shows the expected bank balance at the end of each month.

If you don’t measure it, you don’t manage it

You can’t manage something if you aren’t measuring it. Many businesses don’t believe they have a cash flow problem. However, they are regularly putting their own money into the business, have an overdue tax bill or are paying themselves less than an appropriate salary for their role in the business. This happens because they are not measuring their cash flow. If you aren’t measuring your cash flow then you can’t manage the activities that are having the biggest impact on your cash flow. This results in decisions being made based on how much money is in the bank account rather than on cash flow, profitability or strategy.

Setting up your cash flow forecast

Building a system to monitor your cash flow must be simple, fast and easy to understand to ensure quality decisions are made. Whilst a cash flow forecast can be prepared manually through programs such as Microsoft excel, a number of software programs can save you time by linking directly to your accounting system to not only prepare the forecast but report on actual performance.

If you would like our assistance in preparing and reporting on a cash flow forecast for your business, speak to one of our directors today.

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