The importance of cash flow forecasting
In a pandemic such as this, it is even more important to understand and manage the cash flow of your business.
A cash flow forecast enables businesses to track the expected cash movements over a period of time in the future.
When it comes to future expectations of their profit and loss, business owners tend to know their business inside and out. They know what margin they will make on each product or service and have a good understanding of their overheads.
However, what business owners do not necessarily know inside and out, is how and when changes to sales, purchases and other general business costs will affect their bank balance.
The phrase ‘turnover is vanity, profit is sanity and cash is king’ has never been so relevant.
Why is cash flow forecasting important?
It’s important to recognise that a company’s profit at the end of a given month, does not mean that the company has this much cash coming into the business.
Without forecasting a company’s cash flow, it would be very difficult to estimate how much cash your company will have at a given time. Likewise, if you add to this wages, payroll taxes, VAT, corporation tax payments and loan repayments, the situation can become even more complicated.
It is now more important than ever to understand cash movements within your business. Do you have staff on furlough? When the furlough period ends, will your business be able to afford to retain its current staffing levels? Has your business deferred VAT? What cash position will your business likely be in when it becomes time to repay this liability?
These are the types of considerations that businesses need to be assessing now, rather than when it is too late.
A simple example of why cash flow forecasting is important
A Company sells Product A.
They have to purchase Product A from their supplier, and tend to have stock on hand for 45 days before it is sold.
They are given a 30-day credit period from their suppliers, and they also offer their customers a 30-day credit period.
Based on the diagram, there is a gap of approximately 45 days between having to pay for a product, and receiving the income from their customer.
If this company were to sell multiple other products, all of which had varying lead times, how can the company know how much cash they will have available at any time?
Many businesses that go through tremendous growth, can often find themselves unable to fulfil orders due to a lack of cash and resource available. By plotting out the expected cash movements of each element of your business, it will allow you to plan for the future. The best performing businesses use a cashflow forecast as a strategic tool.
Is there a benefit to tracking your businesses forecasts against actual results?
Some people think that there is no benefit of comparing actuals against budgets, as it has already happened and there is nothing that can be done about it.
In fact, it is quite the opposite. By comparing forecasts to actuals, businesses will gain a better understanding of why they are not hitting certain targets or overspending in certain areas. This will empower businesses to implement changes and create efficiencies.
If you need help to generate a cashflow forecast call Ian on 01772 925230.
Alternatively, fill in the form on our Contact Us page, and we’ll get back to you.
