So, you’re a business owner with a product or service that’s selling well and right now you’re making a profit. All sounds good, so what could possibly go wrong? Cash flow! If you don’t have the funds to pay your bills day-to-day and week-to-week then none of the other stuff matters.
When things are going well it’s tempting to take your eye off the figures while you bask in the glory of your success, rather than focusing on maintaining a healthy cash flow to keep that stability going. But why is cash flow such a make-or-break aspect for small businesses?
Understanding where you stand financially leads to smarter decision making and can help you unlock those all-important growth opportunities at the right time, without putting additional strain on your business.
If you’re not already doing it, cash flow forecasting could transform the way you view your business and your plans for the future.
Why cash flow forecasting is crucial for your business
In business issues don’t usually announce themselves beforehand (now that would be nice wouldn’t it!) and for that reason alone it makes sense to stay close to your cash flow at all times.
A common cause of business failure is unexpected problems within the basic sales and purchasing cycle. In simple terms, one significant client payment being late can quickly wreak havoc with your operation. Now you can’t pay your suppliers on time, your output may grind to a halt and on top of that, your clients aren’t happy either.
When the cash flow chain is broken in this way there are limited rescue options available to business owners, and for those without cash reserves or contingency plans in place it can signal the end of their business altogether.
Cash flow forecasting can help you on several levels by enabling you to:
– Observe and optimise your invoicing and payment processes
– Track the slow and busy periods for your business
– Understand how regular expenses impact your cash reserves
– Identify the right moment to make changes and investments
– Spot payments that are no longer required, e.g., obsolete subscriptions
How limited cash flow can impact your business
Having clearer visibility of your cash flow is a great way to spot the pinch points in your business and predict when issues may arise, enabling you to take action more proactively.
No matter what kind of business you’re in, there are common scenarios where a lack of cash flow can catch you out and potentially stop your business in its tracks.
– Forgot that massive annual bill?
– Vital equipment suddenly need replacing or fixing?
– Major client pulled out unexpectedly?
– Won a major contract and need to expand quickly?
– Struggling with persistent late paying clients?
– Sudden unexpected drop in sales?
How often should I carry out cash flow forecasting?
Unpredictable changes like increased competition, new regulations or a change to material costs can all happen without warning and can have a negative impact on your business. The importance of cash flow was highlighted during the covid-19 pandemic, when many business revenues dried up overnight, and survival plans had to be made quickly.
Whilst you can’t prepare for any of these in advance, carrying out your cash flow forecasting regularly will ensure you’re able to make strategic decisions quickly using the knowledge you already have on your regular incomings and outgoings.
The optimum frequency will vary for each business. If cash flow is very critical, then weekly or even daily monitoring might be required. Monthly is likely to be sufficient for most businesses, and quarterly might be enough for businesses that have good cash reserves and stable operations.
How cash flow forecasting can support business growth
Cash flow forecasting is an essential planning tool and can be used alongside budgets when looking to the year ahead and beyond. If you plan to grow then you may also need to secure funding or an investment in the future, and any bank or potential investor is going to want to see these forecasts before they make a decision.
If your business is relatively new or you have limited credit history then these forecasts can also be a game changing component when trying to secure funding. Having them ready to go in advance of that growth moment can save you precious time when making your application, and ensure you get those funds secured as quickly as possible.
Short term benefits of cash flow forecasting
The cynical amongst you might be thinking this is just another financial admin task to add to the ever-growing list for business owners, but the variety of benefits makes it a no-brainer. Taking a more detailed look at all the financial movements within your business can help you track and review performance productivity in real time.
– Know if your performance is in line with forecast as you go along and identify reasons for significant differences
– Spot cash gaps before they hit your business
– Identify future issues and be proactive instead of reactive
– Monitor and manage consistent late payers, and payments to suppliers
– Know in advance that you can meet supplier/payroll commitments
– Make informed (and better) decisions
– Improve funding and budget management
– Be ready for emergencies
– Be ready for opportunities
Long term benefits of cash flow forecasting
With a closer understanding of your numbers comes the ability to evaluate any assumptions you may be making about your business, assess what’s driving your main costs and whether that can be improved, and most importantly see and manage risks more easily.
Cash flow forecasting also builds up a solid track record of your financial performance and enables you to make tweaks in a controlled way and assess the results of any changes you’ve implemented. Armed with all this extra knowledge you can make important decisions about your business with confidence.
– Increase your overall understanding of your business and spot patterns in activity levels
– Improve your budgeting skills
– Make strategic plans based on facts (not a hunch!)
– Build resilience and stability over time
– Carry out a longer-term profitability analysis
– Become more adaptable to market changes
– Know the best and worst case scenarios for your business
– Manage business change more effectively
How a licenced bookkeeper can add value to your cash flow forecasting
Not got the confidence or time to analyse your numbers but know you need to start forecasting? A good bookkeeper can help. We do so much more than just record keeping and data entry. We collaborate with you to grow your financial knowledge and confidence and help you to establish good business processes and make better decisions, saving you both time and mistakes along the way.
We’re not here to tell you off for not doing things properly either, we want to see you succeed, so don’t let your messy spreadsheets put you off asking for professional help! Getting expert eyes on your financials can unlock the untapped potential in your business and see your opportunities skyrocket.
Working with Purple Orchid Bookkeeping
Number-crunching is my superpower, but over the years I’ve also gathered a lot of valuable insight into what it takes to run a successful business, both from my own point of view and my clients. This knowledge feeds into everything I do, enabling me to not just show you the numbers, but also make recommendations, offer advice and guide you on your business journey.
Building successful relationships is everything in business and that’s why I like to work closely with my clients, getting to know their goals and doing whatever I can to support them. I take time to explain things in a simple way (no jargon allowed here) and I’m licensed and regulated by the Institute of Certified Bookkeepers so you know you’re in safe, experienced hands.
I know that running a business can be stressful and it doesn’t take much for overwhelm to set in. Getting support from a licenced bookkeeper ensures you know where your business is at today and where it’s heading in the future, freeing up your time to focus on what you do best!
If you’d like help getting to grips with your numbers then I’d love to chat with you.
Book a free discovery call today: https://calendly.com/jq_bookkeeping/discovery-call