The Importance of Cash Flow Forecasting

Across years of providing advice to small and medium businesses, most recently as a partner of BridgePoint Group, I have been privileged to provide advice to dozens of start-ups. I love the enthusiasm and ingenuity of the men and women that are prepared to ‘risk it all’ and ‘have a go’.  And I love the fact that start-ups can sometimes bend paradigms. But I have seen more failures than successes and it generally always down to one thing, cash flow.
What is a cash flow forecast?
A cash flow forecast is a tool used by management to help predict the cash flows of a business over a certain period of time.  It works to estimate the bank balance of the business at the end of each period covered in the forecasted period (normally in months).

Why is cash flow forecasting important
In all businesses, cash is king.  Cash flow is the life – blood of all businesses, it is the organ that allows the business to continue to function.  It is essential that all businesses sit down and forecast their cash flow.  Here are the reason why: 

1) Identifies potential shortfalls in cash balances
Cash flow forecasting will help to identify when the business may run short on cash.  It will help the decision makers in the business to be able to change their plan of attack or not make commitments they won’t be able to keep.
2) Attention of customer payments
Keeping cash coming in the door ensures the business will always have money to meet their obligations.  Keeping a close eye on when customers are paying their invoices is key to this.  It is too easy to put off chasing your debtors when you are busy.  (This point is not relevant for businesses like retailers)

3) Ensures a business can meet short and long term obligations
Suppliers who don’t get paid will soon stop supplying you.  Without the suppliers and employees of the business, the business cannot survive.
Tips on preparing a cash flow forecast
In business, things don’t always happen as they are planned and don’t always meet your initial expectations.  Below are a few tips to remember when putting together a cash flow forecast.

1) Always be conservativeWhen estimating your expenses, estimate that they will be higher than initially thought.  When forecasting revenue, estimate it will be lower than you expect.  By doing this, it will give you a worst case scenario.  It will help you to understand that even when things don’t happen as you planned, whether the business will be able to survive.
2) Focus on timingPredicting the timing of your income and expenses is the key to a good cash flow forecast.  The timing of cash flow is what will help to identify if there is going to be a shortfall and ensures that a business will be able to pay its debts as and when they fall due.

Contact Mitchell at Bridgepoint if you would like a free chat about doing your own cashflow forecast with one of our experts. 

If you'd like to see more of our essential tips for managing and promoting your crowdfunding project, you can grab our Guide To Crowdfunding here.

Share this post

Related stories

About ReadyFundGo

ReadyFundGo is a crowdfunding platform and community of social entrepreneurs, business owners, change makers and innovators who have a great idea they want to get off the ground or grow. If you are interested in the world of innovation and ideas, or want to find strategies for raising funds for your own project or expansion, ReadyFundGo can help. To begin your own crowdfunding campaign, start your draft here.