Cash Flow Planning and Forecasting – Why is it so important?
You will always hear throwaway lines like “cash is king”. Yet, the control and understanding of a business’s cash flow may be more important than you think.
Lack of forecasting or a cash flow plan is often the reason businesses find themselves in financial trouble. But not knowing where your business finances are at, can be more stressful than being in debt itself!
The best way to get control back over your cash flow is with a Cash Flow Plan and Forecast. Regardless of how well you think your business is going, forecasting and planning is critical.
Here are some of the reasons why:
Plan out what you know
How can you plan for the future and expect to meet your goals if you have no idea what the future is going to look like? Maybe there is an upcoming cash flow hole for which you need to find a solution, or perhaps you have surplus cash that can be invested or used to grow your business.
Knowledge is power, as they say, and a well-built cash flow forecast will empower you or your business.
Room to Grow
Growing your business is often cash flow intensive, and businesses in this phase are prone to cash flow problems.
You might want to invest any residual cash and profits into growing your business. It’s essential this is managed appropriately and done in a sustainable way.
Control the Good… and the Bad
Knowing the situation helps you control the situation. When talking about cash flow planning, the assumption is – if you are doing well, then you don’t need one.
However, as well as a business is travelling, a cash flow plan may be extremely useful in helping identify new markets or pay down debt.
It is particularly important if you run a cyclical business. Ensuring you manage money efficiently in the good times is critical in helping your business get through the tighter times.
Some Scenario Analysis
Knowing what to expect is a great base when considering other scenarios.
For example, you might be looking at purchasing a new asset for your business. By knowing your current situation and then modifying the forecasts to take into account additional revenue and associated expenses, you will get a good idea of the impact the purchase might have.
Make Better Decisions
Money is a scarce resource. Ultimately, the goal of the Cash Flow Plan and Forecast is to make better-informed decisions when it comes to allocating money within your business.
Okay, so you understand why it’s important, but now what?
Don’t worry. This isn’t supposed to be a step-by-step guide. If however, I’ve convinced you that having a Cashflow Plan and Forecast would benefit your business, then success!
You’ve just completed the first step.
Where to go from here is up to you. A proper Plan and Forecast does take a bit of time and know-how. Especially, one done correctly.
It might be time to chat with a professional that can show you how it’s done. They will have all the tools and advice you need.
I hope this article shed some light on the topic. Whether you are new to cash flow, or you’re a seasoned professional, I’d love to hear what you think.
Feel free to drop any thoughts, feedback or questions to hello@finspective.com.au. I’d be happy to chat.
Any advice on this site is general nature only and has not been tailored to your personal objectives, financial situation and needs. Please seek personal advice prior to acting on this information. Any advice on this website has been prepared without taking account of your objectives, financial situation or needs. Because of that, before acting on the advice, you should consider its appropriateness to you, having regard to your objectives, financial situation or needs.
