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Why Should You Do a Cash Flow Forecast?

cash flow forecast

A cash flow forecast is one of the most important tools every business, large or small, should have.  This tool will pre-warn you of the one thing that shuts down more businesses than anything else, it will tell you if your business is going to run out of cash. 

Even the most profitable businesses can be undone by cash flow. If you don’t have enough money to pay your staff, suppliers or buy product, it can grind everything to a halt..INSIDE SMALL BUSINESS MAGAZINE

Whether your cash flow issue is from not enough sales or too many sales (i.e. growing too fast) the outcome is the same.  Your business stops when you run out of cash. 

A study run by the University of South Australia asked 650 CEO’s of small and medium sized companies whether they had experienced business failure and if so why did their business fail.  The top reasons given were:

  1. Lack of leadership and/or no planning
  2. Not enough sales
  3. No risk mitigation plan
  4. Poor financial management

A cash flow forecast acts as a risk mitigation strategy against all of these issues that cause businesses failure.  

Lack of Leadership and/or No Planning

Business leaders need to plan in order to set a direction, create a culture and optimise resources.  A well developed cash flow forecast creates an opportunity to set targets, plan for staff and understand costs.  It allows leaders to plan and allocate budgets and resources to areas of the business that develop culture. It gives leaders the data to see opportunities to optimise resources by taking the guessing games out of the decision making process.  

Not Enough Sales

Cash flow forecasts allow leaders to understand the volume of sales needed to cover the costs associated with running the business.  By understanding the level of sales needed, leaders can then develop marketing strategies to create sales and measure the success or failure of each strategy against target figures on a regular basis. This gives timely and accurate information to make adjustments quickly if targets are not being met.

No Risk Mitigation

Risk mitigation can only happen in a business if the leaders are aware of the risks in the first place.   A Cash flow forecast that plans and maps the business over 12 months will show risks such as:

  1. Potential human resource issues due to fluctuations in revenues due to seasonal influences 
  2. Supply chain and quality management issues due to rapid growth 
  3. When a business can afford to invest in major assets and what is the best way to finance these purchases
Poor Financial Management
 
Many businesses are started by people with a particular skill or talent that may not necessarily include understanding finances. By actively building a cash flow forecast, business leaders develop a better understanding of their business, expand their knowledge  base and can take better responsibility for the financial management of their business.
 
Get Help
 
Business leaders do not have to go it alone when it comes to learning how to build and manage a cash flow forecast.  Entire Bookkeepers have developed a Cash Flow Forecast Tool that is free to download and includes 15 minutes free personal instruction on how to build the forecast.  The tool simplifies the process of creating a 12 month forecast that can be used to plan and make good strategic business decisions. 

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