What good is a Cash Flow Forecast when I can’t predict the future?

Have you ever saved up to buy something you really wanted?

It seems that everyone is so impatient these days, and with it being so easy to buy things using credit cards or credit accounts, no one seems to save up for things.

However, if you can think of a time when you did save for something, maybe you created a spreadsheet to work out how long it would take you to reach the savings goal, based on putting certain amounts to one side each week or month – a cash flow forecast. Maybe you had to make an adjustment in December because you would be spending more on presents that month, and so couldn’t put as much into savings then?

Cash Flow forecasting follows the same principals really. You are looking ahead at your expected income and expenditures, in order to be prepared for what’s coming.

Be Aware

Just bringing awareness to what’s coming up will do wonders for your business.

However, it is particularly important if you have quieter periods that eat into your cash reserves, or maybe you want to plan for your tax bill. You’re looking ahead to understand what needs to happen now, to prepare. Whether that’s putting money aside each month, speaking to lenders for finance, etc.

I thought a case study might help show why cash flow forecasting is important.

Case Study

Bob has just won a large contract with a major customer. It’s his biggest contract yet and could potentially be life changing.

Bob knows that he will need to take on 2 additional team members to help fulfil this contract and, because of the customer payment terms being 90 days, he will need to fund their wages, and the cost of materials until he gets his first payment from the customer.

Luckily, Bob has a great accountant who tells him he should prepare a cash flow forecast to see if he will need any help financing the project until he gets paid. They sit down together and work out the cost of having 2 members of staff working full time. They write down the estimated cost of materials that will be needed each month and make a note of the amount that will be invoiced at the end of each month.

Now, Bob knows how much he will have to spend in month 1, 2, 3 and 4, before he gets his first payment. (Remember, the customer will pay 90 days after the invoice is issued, and Bob will likely raise his first invoice at the end of month 1, so the first payment will actually come 120 days after Bob has started the work! – Bob’s so lucky to have a great accountant!!)

Bob can now compare the total cash outlay for those first 4 months against what he currently has available. He now knows if he’ll need to speak to any lenders to help him fund the project.

Now imagine what would have happened had Bob not planned ahead!

I do hear, ‘but I don’t know how much I’ll earn each month; it’s never consistent’. To that I say, it’s never going to be spot on so don’t worry too much about it. What’s your best guess? What were your sales for the same month over the past few years? Are there any patterns there that could help you get a more reliable estimate?

Most businesses have an idea of when they will be busiest and when they will be quieter.

Plan for what you know and make your best guess for what you’re not sure about.

The most important thing to do is to start!

Now that you understand how important cash flow forecasts are to running a successful business, why don’t you get in touch to discuss further?

Just call on 01604 662670 or email advice@kilbyfox.co.uk

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