What are the benefits of using cash flow forecasting

What are the benefits of using cash flow forecasting?

By Russell Bowyer
What are the benefits of using cash flow forecasting

The advantages of cash planning for businesses

If your research into the benefits of using cash flow forecasting is because you are wondering whether or not to prepare cash flow forecasts for your business, I hope this article will help in your decision. Let’s take a look…

What are the benefits of using cash flow forecasting? Cash flow forecasting with a business plan allows for better decision making and helps with planning for business growth. Forecasting helps remove some of the risks associated with running a business. It’s impossible to predict the future with certainty, but forecasts at least prepare you for most eventualities.

Cash flow forecasting gives you control over your business finances, and whether you like it or not, cash flow forecasting is a vital part of the decision making process for any business.

If you use cash flow forecasting software, you’ll save yourself a whole lot of time. Cash flow software is much quicker than using Excel spreadsheets. Plus it avoids all the problems associated with having to test your formulas and checking that your figures work and balance.

The benefits of using cash flow forecasting

The following are the advantages for using cash flow forecasting:

  1. Cash flow forecasts with a business plan provides for better decision making.
  2. Supports and assists with planning for growth.
  3. Reduces business risk.
  4. Can be used to highlight problems before they arise.
  5. Builds investor confidence.
  6. Gives confidence to banks.
  7. Great for doing what-if scenarios.

Let’s take a look at each of these in more detail.

1. Cash flow forecasts in conjunction with a business plan provides for better decision making

Most business owners have to make multiple decisions on any given day. But when it comes to any major planning for the future of your business, be it to move to larger premises, taking on significantly more staff or to invest in major capital expenditure, cash flow forecasts are an invaluable tool.

Knowing how your business finances will pan out when you intend to embark on major business expenditure is a vital part of business planning. And cash flow forecasting plays an important part in this.

2. Cash flow forecasting supports and assists with planning for growth

There are many different ways in which a business can grow. But also there are many different levels of growth too. Cash flow forecasting can help you to understand your various options, but before you take the plunge.

It’s also important to understand that cash flow forecasting isn’t a one-off. This means that even if you’ve already committed to a growth plan, this doesn’t stop you from tweaking the plans.

There’s nothing stopping you from preparing and adapting new cash flow forecasts as things progress.

You will always find that things won’t go quite as planned. It is therefore important to be flexible and to be able to adapt to what has changed. You can then re-forecast your cash flows. Plus then revise your plan accordingly.

3. Reduces business risk

Running a small business brings with it a certain level of risk. Which means it’s important to take every opportunity you can to reduce this risk.

Having well prepared forecasts to hand, you are able to see the impact on your cash flow before you commit to any major decision which involves money.

In this article on “how do rapid growth firms deal with potential cash flow shortfalls“, I listed 5 fast growth companies that grew too quickly where lessons can be learned. It might be that these businesses prepared cash flow forecasts. But the ones that didn’t, cash flow forecasting may have helped had they done so.

4. Cash flow forecasts can be used to highlight problems, but before they arise

It’s far better to know in advance what problems may arise in the future. Or at least to be prepared for them.

If and when they occur. One of the key benefits of cash flow forecasting is that it will highlight any potential problems with your future cash flows. This will give you the time needed to help you direct your business away from the problem.

This type of planning and ‘problem-highlighting‘ is particularly important for small businesses which don’t have large reserves of cash to fall back on. Banks for example, prefer better organised businesses. They are more likely to support those which are prepared in advance of problems, see point 6 below.

There will always be situations that are outside of your control. And of course you can’t always prevent them from happening. But having given them prior consideration. Plus by including a worst-case scenario in your cash flow forecast, you’ll be in a better position to deal with any challenges if the problem happens.

However, not all problems can be foreseen, like the current Coronavirus (Covid-19) problem. Whilst Covid-19 has surprised us all and taken many businesses unawares, it’s how you plan for the future that matters next. Even in the current situation, cash flow forecasting still plays a vital role in business planning.

5. Helps to build investor confidence

One of the biggest benefits of using cash flow forecasting software is you’ll be able to provide potential investors with cash flow projections. Presenting professional cash flow reports to current or potential investors will help to give them confidence in your business model.

Your cash flow forecasting must be backed-up with a sound business plan. This business plan needs to contain well thought through assumptions. These assumptions must tie in with your forecasts and must hold up to scrutiny.

The more realistic the cash flow forecasts, which are backed up with solid assumptions, the more likely you’ll receive outside investment.

6. Provides confidence to banks

In a similar way to investors, banks need reassurance that your business is on a sound footing. However, even if your business is about to go through difficult times, this doesn’t mean banks won’t support you.

However, if this is the case and you prepare properly thought through cash flow reports, together with forecast profit and loss reports and a business plan, the bank is more likely to support your loan application.

If the bank manager has confidence that your business will succeed. Plus this success can be demonstrated in your reports, you are more likely to obtain bank finance support.

Bank managers prefer to support those businesses that are well prepared and properly organised.

7. Great for doing what-if scenarios

One of the great advantages of cash flow forecasting is you can do as many what-if scenarios as you like. You can prepare what you hope to achieve over the coming months, which will be your base-line forecast.

But then you can revise this to take account of the upsides if things go even better than you hoe. In other words your best-case scenario. Whilst on the other hand, you can also prepare your worst-case scenario as well.

If your reason for cash flow forecasting is to secure either bank finance or investor money, you are better to apply for more funds than too little. By running various what-if scenarios, this will allow you to properly review what funds you may need if your plans don’t go quite as you hope.

Banks and investors will like the fact that you have given your plans a great deal of thought. And so long as your worst-case scenario still means your business will be a success, you are still likely to secure the funding.

This is far better than if you prepare your best-case scenario hoping for the best, only to find things don’t go as well. This may result in your having to go cap-in-hand for more money. This scenario will lead to a reduced confidence in your business and in your business planning ability.

Other what-if scenarios you can run using cash flow forecasting is to look into how your business cash flows will look like if you implements invoice discounting of factoring. Plus various other possibilities that are better to be modelled beforehand.

8. The +1 benefit of using cash flow forecasting when using cash flow forecasting software

If you use cash flow forecasting software you’ll save yourself a whole lot of time. Cash flow software is much quicker to use than spending time preparing spreadsheets. Having software avoids the problems associated with having to test your formulas and the painstaking process of checking that your figures work and balance.

If you use cash flow software you’ll be able to spend more time on the actual numbers and on the business plan.

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