14 Sept 2021
A cash flow forecast is a way for a business to estimate the flow of cash in and out of their business over a certain period of time. The forecast acts as a plan for businesses to understand how much they can expect to receive and payout over the set period.
Forecasting your business cash flow is a vital part of the daily running of any business and helps give a view of what future finances could look like. This helps business owners make decisions for their business based on what they’re likely to turn over.
An accountant or business owner will use a combination of their previous sales, profit and loss as well as consider any future plans i.e investing in staff, to help build a smaller sales forecast of their next business period. Forecasts are typically between 6-12 months and businesses will then use one to plan the money coming into, and going out of, their business.
Cash flow forecasts help business owners plan how much they can expect to spend and make in sales as well as when to expect money to leave the business bank account. This helps SME owners plan their own bills and manage the business bank account so they avoid any shortfalls.
Forecasting is a big part of the day-to-day running of a business and has some great benefits for SMEs looking to make bigger plans for their businesses. Some of the benefits of forecasting include:
Gives businesses a vision- forecasting is a great tool for businesses to understand what their predicted sales or turnover could be. This helps them to make decisions for their businesses. Having a vision for the future allows for growth and development as well as identifying where they might need to consider financial support
Lets businesses plan growth- cash flow forecasts allows lenders to have a view of the business and where it could go so they’re happy to approve lending and business owners can invest in their growth
Allows for a tightening of purse strings- as well as predicting growth, a cash flow forecast can highlight financial dips or cash drags, letting business owners make cuts or tighten their purse strings on future spending until they’re able to spend again. Some cash drags can have a bigger impact on revenue so when they’re spotted and removed, they make a real difference to revenue.
Whilst cash flow forecasts are great for businesses and lenders to make decisions based on a predicted scenario, there are some challenges too. Some things to consider are:
Gives limited information- a forecast is just that; a prediction that gives limited information for making bigger business decisions but estimations can be wrong. Before a cash flow forecast is made, an accountant will look at previous months performances and use all the information to help make a future forecast. Relying on estimates is one of the major challenges of a cash flow forecast.
Unforeseen external factors- cash flow forecasts are heavily impacted by external factors and one of the major ones for 2020 and 2021 has been the pandemic. Enforced closures, extreme weather events or sudden changes in consumer behaviours as a result of lockdowns would have been unpredictable in any cash flow forecast. To help mitigate this some business owners chose to use a forecasting tool that can be updated in real-time
Government regulation changes- The Brexit vote in 2016 is the most prominent example of government regulation changes significantly impacting businesses in the UK. An example would be the impact on import/ export businesses these changes in regulations had on their forecasts.
Cash flow forecasts are also great for any business looking to borrow money as lenders will use them to base their final decision when it comes to lending. Although they’re not 100% forecasts do help businesses plan and make decisions for their future including recognising when they need financial support.
Find out more about how our team of Business Finance Specialists can help your business with a cash flow loan today.
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