What Is A Cashflow Forecast And Why Is It Important?

by | Apr 7, 2021

There are a lot of moving parts that business owners need to manage and one of those is the business’s finances. When it comes to budgeting and crunching numbers, many business owners tend to yawn and switch off, especially if they feel uncomfortable and would rather push it aside to focus on the day-to-day. However, this is our responsibility as a business owner. We need to stay close to the numbers. Why? Because in business you need to have a handle on your numbers in order to understand your performance and make informed decisions on how to improve and grow. One of the key areas to be aware of is cash and having a cash flow forecast in place.

Running out of cash is one thing, not being able to obtain new sources of finance due to the fact, leads to a business becoming insolvent. Management is essential to ensuring that your business does come into contact with a cash flow crisis. One way to getting on top of this is to have a cash flow forecast in place.


What is a Cash Flow Forecast?

A cash flow forecast is a plan essentially. It is documented in order to help estimate the amount of money that you accumulate and expend over the next twelve months. However, you can create a document that encompasses shorter periods of time. 


Why is it Important?

 Knowing your cash flow forecast can play into scaling your business and knowing where to put your future efforts. A cash flow forecast can help you be proactive rather than reactive. Here are some other insightful benefits:

  • Aids in budgeting: Knowing the whereabouts of your company’s financial standing helps budget for future projects or determines whether it is the right time to invest more money into the business. Business owners tend to know their margins of each product or service and have a general understanding of their overheads but when it comes to changes to businesses expenses (sales, purchases, etc.) they aren’t aware of the effects on their bank balance
  • Profit is key: It doesn’t matter how much money is coming into the business but the profit that you are left with at the end of any given month displays how healthy your business really is
  • Learn from past statistics: You can foresee when there may be cash shortages and whether that is due to the business itself or your late payers. Being aware of potential shortages can warn you before they occur and even putting a plan in place to prevent crisis’ from occurring
  • Allows monitoring of late payers: Forecasting can also assist in determining future behavior and knowing what processes should be put in place to assist this issue, in hopes of preventing it to occur in future. This is not so prevalent in retailers like it would be in a service-based business.
  • Monitoring your own business: Ensures that you can afford your business expenses including suppliers and employees. When the cash runs out, so do they.
  • Sets you up for the year: It’s just another process that will continue to help you keep grounded and on the right path. It is just as important as setting up your budget
  • Aids as an insurance for external stakeholders: When seeking external stakeholders, they may require a regular forecast as they need to ensure that you can manage your cash and would be a responsible choice to engage in business with.

The benefits definitely outweigh the alternative. Without having a cash flow forecast in place that is meticulously updated you can expect to run into issues. It creates difficulty when making informed business decisions and knowing how you can create more business growth.


How to Produce a Cash Flow Forecast

For those who are new to the accounting terrain, there are specific data points that should be noted down in order to produce an accurate forecast.

  1. A sales forecast is a must, prepare the income or sales of your business
  2. Prepare detail on any investments, external financing or other cash that is coming into the business
  3. What cash is going out of the business? Prepare all of your expenses
  4. With all of this detail, collate it into one forecast
  5. The proof is in the pudding and more so in the review to ensure everything is tracking correctly.

One thing to remember when it comes to cash flow is it is all about timing. Prepare your cash flow forecast by keeping the timing of the flow of cash accurate. This way when you read your forecast it can actually benefit your business decisions. 

So you’re on board the cash flow forecasting train and you have the key elements to create one. Download our template today to make it easier for you to achieve this task. Now you have no excuses and we expect a well-detailed cash flow forecast by the end of it. Cove Enterprise Hub is well versed in the world of accounts and all things business sustainability, if you would like to know more on how you can get involved and dissolve your business woes download the template as your first step.



Ready to Take Control of Your Cashflow?

Ready to Take Control of Your Cashflow?
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