Cash management is one of the biggest obstacles standing in the way of small business success. Having the right amount of cash on hand at the right time is key, it can determine if you’re able to expand internationally or whether you can even afford to pay next month’s salaries.
Luckily, there are plenty of tools available to help business owners stay on top of their cash flow. A cash flow forecast is one such tool and can be used to diagnose the health of your business. Below we’ve written a list of many of the insights that can be gained by simply looking at your cash flow forecast.
Your cash flow forecast reveals…
1. Your level of financial security
Your cash flow forecast shows exactly when – and how much – cash is going to enter and leave your business’s bank account over the next week, month, or year. Knowing this, you’ll be able to predict the security of your business’s future cash position and see whether your financials are in good shape or whether can even continue operating at all.
2. Whether or not you can afford to make certain business decisions
With an accurate cash flow forecast, you can estimate the impact that different scenarios, such as hiring a new employee or a 10% sales decrease, will have on your business. Maybe you’ll have to wait until next year to hire that operations manager or maybe you’ll need to downgrade your software subscription to avoid burning up the cash you’ll have on hand.
3. Early warning signs that your business should prepare for cash shortages
A cash flow forecast can tell you well in advance when your business will be strapped for cash. You’ll be able to see if you need to improve the efficiency of certain business areas or if you should take out a loan or find ways to cut costs.
4. The accuracy of your budgets
Your cash flow forecast will allow you to compare the budgets you’ve estimated for sales and outgoings with the actual amount of cash that flows into and out of your business. By doing this, you can see if your budgets are accurate, or if you need to go back to the drawing board and make some changes to your budgeting strategy.
5. How realistic you’re being about invoice due dates
If you’re unable to pay your employees or suppliers at the end of the month, you should make sure money is coming into your business as expected. A cash flow forecast tells you when cash will actually enter or leave your business rather than the date the bill or invoice was raised. If you find less cash in your account at the end of the month than expected, you may need to do a better job of chasing your clients to pay their invoices.
Consider adding an ‘expected payment date’ to your invoices in addition to their due dates, which will show a more accurate picture of when funds will actually hit your bank account. Cash flow forecasting apps such as Float for can link to your accounting software (i.e. Xero) allowing you to factor expected payment dates directly into your cash flow.
6. If you should seek out where you can reinvest excess cash
You can also anticipate when your business will have more cash at its disposal than usual. With a cash flow forecast, you can know exactly when these cash-rich periods will happen and explore what you can do with these excess funds, such as reinvesting in other areas of the business like employees’ salaries or buying more inventory.
7. If your business is on track to meet its goals and objectives
A cash flow forecast will allow you to see if your business can meet expectations in sales, client growth, turnover, etc. If you’re not on track to meet these goals, your cash flow forecast can also flag the specific areas of your business that need attention – maybe you’ve overspent on marketing & advertising or maybe you need to cancel that weekly fruit basket delivery. Your cash flow forecast will be able to help you identify these areas.
8. If you need to improve your business’s financial planning
Even if you’re developing a revolutionary new product that will change people’s lives, your business’s financial situation cannot – and should not – be ignored. If your cash flow forecast needs help, it’s time to consider investing time to formalise your business’s financial planning efforts with things like cloud accounting software, better cash flow forecasting, or management reporting. Seek advice for your accountant or bookkeeper, who will be able to advise you what strategies are best for your business.
This is a guest blog by Float, for more information visit floatapp.com.