Why Cashflow is Critical for Your Business

Managing your business without a cashflow forecast is like driving with your eyes shut. You’ll probably be able to survive a short distance. But it’s dangerous and you won’t notice the danger until it’s too late.

Prepare your cashflow forecast with accuracy and make business decisions with confidence.
Prepare your cashflow forecast with accuracy and make business decisions with confidence

So what is cash-flow, why is it so vital, and how can you ensure you stay on top of it?

Let’s start with a definition for cash-flow.

Cashflow is simply the cash (cash-equivalents) that’s transferred in and out of your business. Positive cashflow is good. It means you have more cash flowing into your business than is flowing out. Negative cashflow is the opposite and means you’re spending more than you’re receiving.

Most business owners understand this concept. It’s a simple one that must not be ignored.

Why should I prepare a cashflow forecast?

Negative cashflow can signal a “red-flag” or indicate a significant warning sign. Most businesses will suffer if cashflow is negative over several weeks or a months and cash reserves are depleted.

Staff wages and salaries aren’t paid, vendors demand payments, loan payments are missed, and landlords repossess their properties.

Prepare your cashflow forecast with accuracy and make business decisions with confidence

It’s easy to see why managing cashflow is critical. To help, businesses need reliable cashflow forecasts. Businesses will have regular monthly fixed payments to make (cash that “flows” out), such as rent and wages.

These may easily represent a significant portion of a business’ overall expenses. Added to these may be raw materials and stock; as well as utility bills, office and factor consumables, and unplanned overheads.

Businesses can only pay these when there’s cash in their bank accounts. Knowing the sources and certainty of cash receipts is vital to sustain healthy cash-flows.

Grow your business

You may have developed robust sales funnels which result in steady flows of enquiries and new customers. If you have, congratulations. Your prospects look good, in theory.

Sadly, businesses can’t pay their bills with theoretical cash. They need cleared and readily available funds sitting in their bank accounts, ready to use. If they don’t, unpaid bills can quickly pile up.

This is why it’s vital to estimate or forecast your cash-flow requirements. You’ll need to identify when you’ll have shortfalls and take action to address them. You need to know when you’ll have cash coming in and when you need to pay your bills.

Ideas to improve cashflow

We’re always keen to share tips to help improve cash flow. We’ve previously written articles sharing some insights we’ve observed from working with our clients.

Here three tips for managing cashflow:

Optimise cashflow receipts by invoicing your customers promptly. Customers will rarely pay before you’ve invoiced them. Prepare invoices promptly and circulate them as soon as you’ve shipped your product of completed your work.

Control cash exiting (or leaking from) your business: Concentrate first on your essential outgoings. Have you compared other suppliers’ prices? Consider shopping around for cheaper subscription or utility service providers.

Think about spreading cost of large purchases, such as motor vehicles and computers Consider lease options rather than pay one-off large amounts.

Develop your cashflow forecast. Invest in one of the many good small business accounting software packages. Reliable, accurate and prompt financial forecasting will be one of your closest allies. It removes much guesswork out of forecasting cashflow and highlights early warning signs so you can take swift action.

Prepare cashflow projections for the next week, one month and three months. It’ll give you the information to take action. You’ll know when to follow-up overdue customer payments, plan your outgoings and when to seek additional short-term funding.

Conclusion

There are many advantages to preparing cash-flow forecasts. Least of all they will give you greater insight and confidence to help you achieve a prosperous future. Prepare your cashflow forecast with accuracy and make business decisions with confidence!

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