One of the most important aspects of financial business management is the practice of cash flow forecasting. Whilst it may sound like another headache of calculations, the exercise is in fact a simple process that can prove extremely important in the long-run.
In simple terms, cash flow forecasting is about predicting future levels of cash to ensure your business has enough to survive on. Normally done for each month, the result of a cash flow forecast is an estimate bank balance at the end of each period covered. When done effectively, cash flow forecasting can even work seasonally, meaning that you can plan for specific variations in cost depending on the time of year. With gas bills for example, a good cash flow forecast would recognise that these costs are likely to experience a sharp increase during the winter months, and would give management the opportunity to plan in advance.
The importance of cash flow forecasting is relatively straightforward – if a business runs out of cash and cannot source any emergency finance, it will become insolvent. Whilst it should be used by all businesses, cash flow forecasting is especially important for start-ups and small enterprises, that may experience difficulty in obtaining investment. What’s more, regular cash flow forecasting can even help when it comes to securing a loan or an overdraft facility, as certain banks and lenders may want some sort of assurance that the overall health of the business is sound.
For more ways in which you can improve your cash flow, why not have a look at our ’10 ways to keep cash flowing’ download?