Why Cash flow Forecasting is Vital for your Business
Why is cash flow forecasting so important?
Cash flow forecasting is a vital part of running a successful business. Some owners think managing cash flow simply means keeping track of how much money enters and leaves their checkbook, but there’s actually far more that goes into it.
Cash flow forecasting, for example, is an incredibly valuable tool that helps you anticipate cash flow issues, plan for times when your cash flow is limited, and show the bank that you are prepared.
It’s an important process that you shouldn’t ignore. Here are some ways cash flow forecasts help you and your business.
They help identify cash flow issues before they happen
Identifying cash flow issues is paramount. Most businesses go through slow periods. Sometimes, those periods are obvious. A seasonal business, for example, will have decreased income during the off-season. There can be less obvious peaks and valleys in your income, though, that you have an opportunity to prepare for.
Your cash flow forecast can help you monitor your day-to-day cash flow. You’ll be able to anticipate when the cycle will be slow before it hits. You can avoid a cash crunch by anticipating when cash inflows be light—or when you’ll have to spend more than planned.
By examining your cash flow over the previous years and forecasting your future cash flow, you can better anticipate financial cycles and how they affect your bottom line.
Forecasts help plan for tougher times
Most businesses have both good and tougher times. It’s tempting to spend money when times are great. Your company may need new equipment or maybe you want to give your staff a raise or a bonus.
That’s a great thing to do, but it’s only helpful if it doesn’t put your company in financial jeopardy.
Cash flow forecasting is a great reminder about how your bank accounts will look during tougher times, so you can make important decisions about when to spend your money and when to save.
If you know a slow period is coming up, it might be better to save your money for now and give out smaller bonuses. If you can anticipate your slow period, you can plan major purchases and payments around it, to further stretch your cash.
At least by conducting cash flow forecasts you’re less likely to be surprised by a sudden cash flow crisis.
Cash flow forecasts show banks that you can plan ahead
Banks prefer to give their money to companies that show they are capable of planning ahead. Financial institutions prefer lending to businesses who are realistic with their financial projections and show they have a means of addressing cash flow issues.
Word to the Wise
Forecasting your cash flow gives you a clearer picture overall about your business and how the money moves. It provides important insight into your business’ financial health.
If you haven’t done cash flow forecasting yet, it’s a great idea to get started now so you have a better understanding of your company’s finances today and so you can prepare well for what tomorrow brings.
If you want help to improve your cash flow and overall company health, please contact us today!