6 reasons why your business needs a cashflow forecast

Cash is king. It is the oxygen that allows your business to breathe.  Without cash and liquidity, your business simply cannot function.

  What do we mean by cashflow?Cashflow is the amount of money that goes in and out of your business. Cash flowing into your business will include money from sales to customers primarily and may also include the more occasional sale of unnecessary assets and grant income, for example.  Whereas outgoing cash, for example, includes payments to suppliers, wages, bills, operating expenses, and other business capital expenditure.

What is a cashflow forecast?A cashflow forecast is a summary of planned cashflow in and out of the business and can cover anywhere from 30 days in advance, to a year in advance. We always recommend our clients create a month-by-month forecast for the next 12 months as a minimum. It is usually presented in columns, and you should be able to see the cash in and out each month, and the impact on your cash balance at the end of each month.

6 reasons why your business needs a cashflow forecast As a business owner, there are many reasons why cashflow forecasting is an important tool when running a successful and growing business.  From experience of helping many businesses over the years, here are 6 main reasons we see cashflow forecasts assisting our clients’ businesses to succeed and grow year on year:

1. Puts your business plans to test – doing a cashflow forecast, will determine whether your business plans and goals over the next 12 months are viable from a cashflow perspective because it predicts where all your cashflow is likely to go throughout the year. It also tests out whether you are on track to becoming a cash-generating business and taking action if this is not the case. 
2. Identifies upcoming cash gaps or shortages - this is important as it is crucial to identify cash gaps promptly, as the larger the cash gap is, the greater the risk of negative cash flow.  It is key to spot these early and gives you time to work on contingency plans, whether this may be delaying spending, requesting extra credit from suppliers, or perhaps securing a loan.
3. Plan for different scenarios – being prepared for the unexpected ensures your business is equipped to cope with any unforeseen circumstances that may crop up throughout the year. By testing out your cashflow forecast with different scenarios, this will ensure you are ‘stress-testing’ your business.  For example, what does cashflow look like if sales are 15% down, or how does September cashflow look if we purchase a new machine that month.
4. Assists in decision making - accurate cash flow forecasts provide valuable information for making informed business decisions. They help in evaluating the feasibility of new projects, determining the optimal timing for investments or loans, and assessing the impact of potential changes in sales volumes, pricing, or expenses.
5. Give confidence to your stakeholders – shareholders, directors, management team, investors and lenders are more likely to put their energy or invest in your business if they can see a forecast mapped out for the year, as this helps give them added confidence in your business. 
6. Worry less about your cashflow – as a business owner, having your cashflow forecast mapped out means you can spend less time worrying about where your cashflow is coming from, and spend more time on doing what is important – that is growing your business.

As a business owner, cashflow forecasts are an essential tool to manage your business. They will help you to make strategic business decisions, predict times of negative cashflow, and provide peace of mind that your business will survive and thrive.

Whilst having a strategic cashflow forecast for the next 12 months is paramount, it is also important to track and manage cashflow every week in-house if you can.  Our consultants have put together a weekly cashflow forecast template which you can download for free. 

If you would like any further information or assistance with cashflow forecasting, please don’t hesitate to get in touch. Whether it’s helping you with a cashflow forecasting and scenarios or implementing regular financial management reports - let’s work together to grow and strengthen your business.

Please note: This article is provided for information only and was correct as at time of writing (20/06/24). Any lists and details provided above are not exhaustive and are not intended to be full and complete guidance.  No action should be taken without consulting detailed legislation or seeking independent professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted.