It’s important to recognise that CASH is what keeps your business alive. Despite the fact that cash is the lifeblood of a business many SMEs don’t truly have a handle on their cashflow.
At any stage of the business life cycle, cashflow is of vital importance to the health of your business. One saying is: “revenue is vanity, profit is sanity, but cash is king.”
Put simply, businesses go bust in the long term because of the lack of sales or profit but, in the short term, they can fail because they don’t have enough cash to pay their bills.
It’s not uncommon for businesses to put off forecasting their cash, often due to a lack of time or perceived value of doing so. In reality, cashflow forecasting not only helps ensure you meet all of your outgoings but can also puts you in a stronger position to support future growth and making the right business decisions .
Growth can actually bring serious problems to a business. Few business owners ever think about it because they think all growth is good. But growing sales too quickly, or getting a single very large order, can create serious cashflow problems.
One way of making sure a business has as much control as possible over the money that moves in and out of its bank account is to put together a cashflow forecast.
Putting together a cashflow forecast allows a business to anticipate future requirements and the high and low points in its cash balance.
A cashflow forecast works by charting how much money is to be paid in to a business over a fixed period of time and how much money the business will pay out during the same period. It must cover only the actual sums of money received and paid out - not invoices issued and received.
The fixed period covered by a cashflow forecast can vary from a quarter to an entire year. It is usually divided into smaller sub-periods such as months or weeks or even days. The forecast will show monies paid in and monies paid out, enabling the business to plan ahead, taking into account growth predictions.
Cashflow forecasts change according to trading conditions, business activity and market trends. For this reason, they must be adjusted and updated on a regular basis.
The advantage of a cashflow forecast is that it provides a business with a useful way of anticipating any downturns in its cash balance. It also helps a business decide when it is ready (or not ready) to take on additional financial commitments.
Another benefit of a regularly reviewed cashflow forecast is that it makes it easier to plot steady, sustainable business growth and to avoid the dangers of overtrading.
Often starting the process can be very simple and your professional advisors will be able to help you start and maintain a system which works for your business.
For advice on cashflow matters and forecasting please contact Wayne Gutteridge