So how can cash flow forecasts help entrepreneurs?
Firstly, it’s important to understand why there is a need in the first place.
Managing cash flow is a vital part of running a successful business. Some business owners think managing cash flow simply means keeping track of how much money enters and leaves their business. And that is a big part of it. But there’s more nuances that goes into it. Especially the mindset side of things.
Cash flow forecasting is an incredibly valuable tool that helps you anticipate cash flow issues, plan for days when your cash flow is limited, and show the bank that you are proactive if you are working with them on anything.
It’s an important process that you shouldn’t ignore. Here are some ways cash flow forecasts help entrepreneurs.
They help identify cash flow issues before they happen
Most businesses experience slow periods. Sometimes, those periods are obvious. A seasonal business, for example, will have decreased income during the off-season than during the on-season. But there are often less obvious peaks and valleys in your income, which helps to have front of mind.
Your cash flow forecast can help you monitor your day-to-day cash flow and anticipate when times will be slow before they hit. By anticipating when cash coming into your business might be light—or when you might have to spend more than you’re accustomed to—you can avoid a cash crisis.
By examining your cash flow over the previous years and forecasting your future cash flow, you can better anticipate financial cycles and how they affect your bottom line.
They help plan for tougher times
It’s tempting to spend money when you have a lot coming in. Parkinson’s Law is a great reference in being mindful about this. Your business may need new equipment or maybe you want to give all your employees a raise or a bonus.
That’s a great thing to do, but it’s only helpful if it doesn’t put your business in jeopardy financially further down the track.
Cash flow forecasting is a great reminder about how your bank accounts will look during tougher times, so you can make important decisions about when to spend your money and when to save it.
If you know a slow period is coming up, it might be better to save your money for now and give out smaller bonuses. If you can anticipate your slow period, you can plan major purchases and bill payments around it, to stretch your cash further.
At least by conducting cash flow forecasts you’re less likely to be surprised by a sudden cash flow crisis. In that way cash flow forecasts can help entrepreneurs create a plan well before the challenges arise
They show banks you can plan ahead
Banks prefer to give their money to entrepreneurs who show they are capable of planning ahead. Financial institutions prefer business owners who are realistic with their financial projections and show they have a means of addressing cash flow issues.
Final thoughts
Forecasting your cash flow gives you a clearer picture overall about your business and how the money moves into and out of it. It provides important insight into your company’s financial health.
If you haven’t conducted cash flow forecasting so far, it’s a good idea to get started now so you have a better understanding of your company’s finances and so you can prepare for the future.
Combining a cash flow forecast with Profit First implementation is what we recommend and do with all our clients. Talk to us today to have a further chat on how cash flow forecasts can help entrepreneurs
