How a good cashflow forecast can benefit your business
A cashflow forecast is a useful tool when running a business. It can warn you of stormy times ahead, help you achieve steady growth and steer you safely through a downturn. It could also help you access additional finance because it can be used when you’re approaching investors.
We discuss how a current and flexible cashflow forecast can benefit your business.
Grow your business steadily
Today’s sales are the source of tomorrow's cashflow. While increases in sales are often celebrated, it’s worth remembering that extra orders can mean extra fulfilment costs, reducing your cashflow in the short term.
How will forecasting help? With accurate and adaptable forecasting, you can make multiple projections to see – at any stage in your business – how much extra cash you would need to fund various sales increase scenarios.
New factors, such as unexpectedly large orders, can also be worked into your forecast. This will show whether you can realistically fulfil them without overtrading (when a business accepts extra work but exhausts its resources before fulfilling the demand) or damaging your existing commerce.
Stop trouble in its tracks
If your forecast shows a cash squeeze is on the horizon, there are things you can do to prepare for it, such as:
- Minimise costs
- Reduce stock
- Agree extended credit terms from suppliers for that period
- Maximise sales volume and margins (or slow down growth, if that’s causing a problem)
All of these actions are more easily achievable with proper planning and time on your side. For example, if you can see in advance that you’re going to have difficulty making tax, National Insurance or VAT payments, HMRC’s dedicated Business Support Payment Service may be able to help you spread these costs over a longer period of time.
Stay strong when times are tough
In difficult trading conditions, updating your cashflow forecast on a daily basis could give you the edge over your competitors. It may sound excessive but in extreme conditions, having an exact hold on your cash position at all times could be the difference between surviving or sinking. When negotiating with customers and suppliers, you could use your forecast to help set terms that’ll get cash into your business precisely when you need it. For example, by obtaining deposits or negotiating timetabled stage payments.
Access extra funding
If you master cashflow forecasting (and produce the projections to prove that extra funding is a vital part of your business plan) you’ll have better access – possibly at better rates – to additional finance. Extra funding, such as an overdraft or loan, can see you through a cash drought, while asset or equity finance can inject vital extra funds to achieve growth. Regular forecasting means you’ll know when it's the best time for your business to secure this type of finance, and how to use it to your advantage.
Our tips for cashflow forecasting
- Involve key staff to raise cashflow awareness, and ask them to tell you immediately if they discover anything that could substantially alter your cashflow
- Regularly compare your forecasts with your real cash position. This will help you see what’s working, and where to make improvements in your business processes
- Build pre-set warning signals into your forecasts. For example, you might decide that when you come within 10% of your overdraft limit, you'll draw on cash set aside in another account, or seek external finance. This helps you avoid rushed (and possibly bad) business and financial decisions.
Need more information on cashflow forecasting? Read the Chartered Institute of Credit Management’s guides