All SMEs rely on accounting and management reports to evaluate the performance of their business and to make informed decisions going forward – however not nearly enough businesses consider cashflow forecasting as critical to their future success.
A business can be making a healthy profit with an attractive balance sheet however an unanticipated cash shortfall can very quickly snowball into some huge problems, least of which might be some expensive short-term finance.
Here are five reasons why cashflow forecasting should be on every business agenda:
1 Anticipate cashflow shortages
This is the obvious reason to complete cashflow forecasting. If you can anticipate that the business will be cash-poor ahead of time – effective planning can ensure that salary and wages, debtors and even paying yourself can continue without disruptions.
There are a multitude of finance solutions that can effectively manage an anticipated cash shortfall – however a lot of them won’t be available once the cash is gone (and certainly not as cheap).
2 Utilise a cash surplus
Having too much cash is a good problem to have! Often an afterthought to cashflow forecasting, knowing when the business will be in a cash surplus position will enable you to plan accordingly.
Whilst it is nice to have cash in the bank, knowing that you should be in a surplus will enable you to plan accordingly – whether that might be to bulk-buy some stock, pay some dividends or even identifying the right time to launch a new venture.
3 Hope for the best, plan for the worst
Cash flow forecasting is a great tool to assist with contingency planning. Even the most stable business can be quickly affected by an unanticipated event – which could as simple as a reliable customer falling short on payment.
Understanding when and where your cash vulnerabilities are and having some contingency plans in place could save a big headache.
4 Real-time budget impact
A good cashflow forecast can be easily adjusted as actual results are recorded and the impact of any variances to your budget can be quickly assessed – especially in the short to medium term.
An unexpected cash expense may not look too critical if you are able to meet it – however your forecast may show that you need that cash in two months’ time.
Comparing your cash flow budget to actual results will also give you valuable information on your spending and the accuracy of your budget – or highlight some cost saving opportunities.
5 Make healthy withdrawals
A cashflow forecast will arm a business owner with confidence that they can complete cash drawings from the business without detrimentally affecting the future operations.
Alternatively, you will be forewarned that should you withdraw a cash surplus today – you may need to tip funds back in a few months’ time.
With modern cloud accounting systems (such as Xero) and plenty of easy to use and powerful forecasting solutions, there are no excuses for business not to be evaluating their future cash movements.
If you currently don’t have any cashflow forecasting (or even a general budget) and would like to discuss your needs – please get in touch with us at Walker Wayland Advantage.