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The Value Of Cash Flow Forecasting (And Why Your Business Could Fail Without It!)


A business cash flow forecast will give you vital business intelligence to help you scenario-plan, search for cost-savings and look for strategies that will preserve your cashflow position. Want to know more Let’s talk.

Cash flow is affected by a multitude of variables. Its continually evolving nature means it has an immediate and ongoing impact on your business, whether that be good or bad.

Given the volatile nature of your cash flow, businesses should prepare, and put in place, comprehensive forecasts. Once established, they should be reviewed regularly to make sure you’re not caught short with unexpected (or unnoticed) financial obligations.

What is a cash flow forecast?

A cash flow forecast is a worksheet that helps estimate the movement of money into and out of your business (at any time) based on your projected income and outgoings. While cash flow forecasts can project estimates for up to 12 months, these are usually unreliable as a lot can change in 12 months. Most businesses need cash flow forecasting for a much shorter term, generally covering the next four to twelve weeks. The shorter the period, the more accurate you are likely to be.

Why is a cash flow forecast important?

In addition to understanding how cash is flowing in and out of your business, accurate and timely cash flow forecasting is vital for a range of reasons such as:

1. Budgeting

By forecasting your income and budgeting, you can ensure you have adequate funds available to meet your tax obligations, pay your suppliers and employees on time, and compensate yourself for all the work you do. Keeping your suppliers and staff happy by always making sure they are paid on time is a critical part of business success. Not meeting your financial obligations to suppliers and staff will cause friction and loss of loyalty. Running out of cash can have an immediate catastrophic effect on your business, from which you may never recover.

· Get out of business debt faster

Debt repayment can take up a large portion of cash outflows. Cash flow forecasting will help businesses ensure they have ample cash to pay debts as they fall due, which will reduce default or additional interest costs.

Some lenders require a business to have a surplus amount of cash on hand to ensure they can meet their repayments. A debt covenant breach may require you to pay the full balance without any warning. Failing to do so could result in insolvency. Knowing exactly when your debts are due and making sure you have the funds available to pay your debts when needed will save you from the risk of bankruptcy. If you do find yourself in this position, make sure you seek advice from an insolvency expert as quickly as possible.

2. Predictable business growth

When a business is expanding, it can quickly churn through available cash. Having a cash flow forecast will help you manage your flow of funds more effectively and allow your business growth strategy to be executed in a predictable and controlled manner.

Banks and investors will want to examine your business’s cash flow forecast before providing a loan or investing in your company’s growth. By maintaining a professional and adaptable cash flow forecast, you will be more likely to win over external stakeholders when needed.

· Enable prudent business decisions

Running hypothetical business changes such as: taking on extra staff, buying more equipment, buying a business property etc., as ‘What if’ scenarios through your cash flow forecast is the best way to predict their impact. If you can pre-determine when your cash surpluses or shortages are likely to occur, you can plan and make informed decisions ahead of time to ensure your business’s survival and growth.  

As a measure of due diligence, run both a best-case and worst-case scenario to see how your business will cope in the best and worst of times. Monitoring the impact of any significant financial changes (both positive and negative) will inform you whether trading is better or worse than expected.

· Outsource to a qualified professional

Without adequate cash flow forecasting, symptoms of poor cash flow are often treated inadequately (and perilously) by accessing expensive debt options or drawing on personal funds. While both these options may temporarily relieve cash flow pressures, unless they are part of an informed plan, they may increase financial stress and liquidity down the line.

Many business owners don’t have the financial knowledge or skills to handle cash flow forecasting accurately or effectively. In these cases, it’s important to partner with a qualified accountant or bookkeeper who can guide you through the process, create accurate forecasts, monitor and report the results while making necessary adjustments regularly.

Outsourcing to a qualified expert can help determine the root causes of financial issues, help you set up a cash flow forecasting system and positively impact the outcomes by developing solid plans and putting well-defined processes in place.

Running your business can be an overwhelming and exhausting process. By making sure you are well prepared with a solid cash flow forecast, you can regularly assess your progress, plan for change, and know when, where and how to facilitate business growth to ensure every possible chance of long term success.

If you need help with your cash flow forecast, contact Numble today so we can get you started on the road to successful business growth.