The main disadvantage to cash flow forecasts is the reliance on historic data to predict future cash flows for the business. You are also reliant on your best estimates of what will happen in the future, but these could be wrong.
Whether you like it or not, cash flow forecasting is a vital part of the decision making process for any business. Using cash flow forecasts in conjunction with a business plan provides for better decision making and helps with planning for growth. Planning for the future helps to remove some of the risks associated with running a business. Whilst it’s impossible to predict the future with certainty, by preparing forecasts at least prepares you for most eventualities.
How is it possible to have high sales and high profits and run out of cash is pure and simple: If your business fails to convert business sales into profits, but more importantly into cash-profits, the business will fast run out of cash and could even fail.
Cash flow forecast software with opening balances is the same as a car with wheels. In other words, a car without wheels isn’t a car and neither is software without an opening balance feature cash flow forecasting software. If you’re a business with accounting periods before the beginning of the cash flow forecast period, you will have opening balances. At the very least you’ll have a starting bank balance to bring forward. But more than likely you will have opening balances of amounts owed to your business by customers and amounts owed by your business to suppliers. Then there’s opening stock, loans and fixed assets and depreciation to consider.
Why a cash flow forecast is important to your bank manager is so they can build trust in you and your business. Being able to produce professional forecast reports, together with being on top of your numbers, will help to earn their trust. Your bank manager needs to see a cash flow forecast in order to approve loan applications. They will use your forecasts in conjunction with your management accounts and historical accounting information to confirm your business is viable and able to comfortably repay the loan. The combination of the forward period reports together with historic data will help to build a picture of credibility.
Cash flow software with depreciation included as a function will do so showing depreciation as a non cash expense. This means that whilst the cash flow software takes account of deprecation, this is not for the purposes of reflecting it in forward period cash flows. But is instead to include the depreciation expense on the forecast profit and loss, the projected balance sheet and the forecast cash flow statement reports instead. Additionally, deprecation is an add back for tax if you intend to add forecast tax payments into your cash flow reports.