Welcome to ...Cash Flow
The importance of cash flow forecasts
Cash flow forecasts are used to predict your business’s future financial position for the period ahead, from three months to a year in advance. Your forecast allows you to see what money you expect to be paid into the business and the amount you’ll need to pay out. It’s a useful tool to help you manage your business more effectively.
If you owned a typical downtown retail store with high sales over Christmas, and then a traditional slump after the New Year Sales, your cash flow forecasts would show high income in December and much lower income over the following two months. Your forecasts would also show stock purchased on a 60-day term ahead of the festive Christmas rush in November and December would need to be paid at the end of January and February.
If you racked up record Christmas sales, there might be a strong temptation to splash out and buy that big-ticket item you’ve been hankering after – but can you really afford it? A quick look at your cash flow forecast will probably tell you that you need to park the thought of a new SUV or fishing boat and reduce your drawings by downgrading your request to Santa for an iPad. Otherwise, you’ll have no money left to pay for the stock you sold in December.
If you’re more pragmatic and less inclined to impulse spending, your forecast will also be able to tell you if you’ll generate enough profit to cover the costs of new refurbishments or opening a new store.
Say your forecast sales figures for March and April will be down on previous years, as a result of continued low national economic growth, the global financial turmoil or the arrival of a new competitor in the market. You might need to arrange short-term finance to tide you over or find ways to increase sales to cover your monthly overheads and operating costs.
In summary, your cash flow forecast gives you a future view into your business finances. It helps you identify cash flow problems before they appear and allows you to make informed business decisions.