The importance of cash flow forecasting

Most of us who own and run businesses will be familiar with the term “Cash is King” recognising the importance of being able to pay our staff, suppliers and other financial obligations as they fall due. Keeping a reserve or emergency fund is also advisable.

This is crucial as even profitable businesses can run out of cash if they are expanding and possibly overtrading, or they simply have peaks and troughs in cash flow, for example when quarterly VAT payments or personal/corporate taxes are due.

Many businesses will do some form of cash flow budgeting, however this is often inadequate or done once a year, rather than monitored and updated on a regular basis. Often it is only done because the bank has asked for it.

So why it is important to set out your own cash flow forecasting?

For you, not just for the bank

A Cash Flow forecast will help you identify possible occasions during the coming months when your bank balance or overdraft facility may come under some pressure. Your bank or other funders will be impressed if you have identified this well in advance and can present them with up to date accounts and a cash flow forecast that demonstrates a need for additional funding as well as the likely timescale for repayment. They are much more likely to support you, as compared to speaking to them when a short term cash flow emergency hits.

Forward tax planning

In addition to identifying the timing and magnitude of tax payments, a cash flow forecast may also help you tax plan with confidence, for example if you might be considering capital expenditure or pension contributions before the business or tax year end.

Early warning system

By comparing actual cash flow with what you have projected in your forecasts, it may assist in identifying areas of weakness, for example if your customers are starting to slow down their payments to you, or perhaps your own sales are falling behind budget. A monthly review against cash flow budgets can assist in helping you take remedial action.

You should consider what form of cash flow forecasting works best for you, however it can be a powerful tool in keeping in control of your business finances.