Cash flow forecasting and management is a key aspect of financial management for any business planning its future cash requirements to avoid cash flow difficulties. A key part of my remit for clients is to provide useful indicators of the areas that you should consider when preparing and managing your cash flow forecast. From experience, too many businesses just rely on their bank balances to gauge their cash flow position and then realise too late that they cannot meet their liabilities, or they overlook provisions for tax liabilities.
It’s not just about being careful in the tough times
Often as business owners our focus only turns to cash flow management when we experience difficult trading conditions and can see that our revenues are going to drop for a period of time.
It is important to note that the seeds of a cash flow issue can often be sown while times are good. Increasing sales are great but they do come with additional costs: materials, labour, resources, premises which can all reduce your cash flow. Sales are tomorrows cash inflows, but they also increase our need to invest and it’s crucial that remains a manageable position.
A sales is not a sale until it is paid for
This is a well-known axiom. So how does a cash flow forecast assist?
- You can produce multiple forecasts for different scenarios to assess how each scenario impacts on your cash flow.
- You can factor in new product, potential large orders, and changes in the current business model or market. This provides a realistic forecast on how these factors will impact on your cash position and whether you can fulfil them without over trading
- The forecast provides you with an essential document that assists your cash management
Ultimately it maintains your finances in a controlled environment and provides reassurances with forward planning.
The essential checklist to prepare yourself for cash flow difficulties
- Review regularly how you can minimise your costs and overheads
- Review regularly how much stock you are holding and ordering
- Agree extended terms of credit with suppliers
- Maximise sales volumes and margins
- Ensure your cash position is clear in your monthly management accounts or that your finance team are preparing a separate cash flow report for the board.
Knowledge and proactivity are the key words here. It’s incredibly difficult to address issues like a change to supplier payment terms, or changing your credit control process at the last moment. If there is a certain amount of unavoidable risk in your business model then credit insurance may be a worthwhile option to look at.
If you’d like to understand more detail about how you can take control of your cash flow management, I’ve produced a free e-book packed with useful tips for business owners on how to understand the subject and plan better.
I also welcome the chance to talk to business owners about the subject and help in any way I can. I run a Business Finance Club based in Dorset which meets on a monthly basis and is a friendly forum for business owners and accounting professionals to share knowledge. You’d be most welcome to join us. Alternatively if you’d just like to chat on a 1-1 basis then my door is always open.