Poor cash flow is the cause of up to 80% of small business failures. Make sure your business doesn’t become another statistic.
Seizing an opportunity for growth, responding to threats quick-smart and keeping stakeholders happy – these are all hallmarks of good business. And they all require good cash flow management.
In fact, cash flow management can make or break a business. According to global commercial insight specialists D&B, poor cash flow is the reason for four out of every five small business failures.
“Even if you’re making a profit, if you don’t have enough liquid assets available to pay your bills, you’re going to struggle to stay afloat,” says D&B in their special report on cash flow forecasting.
What is a cash flow forecast?
A cash flow forecast is an educated guess of your incoming and outgoing cash for a future period. Basically, it helps you plan your payments to ensure you’re not hit by unexpected cash shortfalls.
Unlike cash flow tracking, which is a literal record of payments made and received, a cash flow forecast is a forward projection on where you estimate your cash will be in the short and long term.
Why do you need one?
Simply put, if your enterprise runs out of cash and can’t pay expenses, it will become insolvent.
Having a plan of attack to make sure you’re never in a cashless situation is therefore vital to the survival of any small business.
Here are some of the key reasons why a cash flow forecast is so important:
Avoid nasty shocks
There is nothing worse than having to put off that new equipment purchase or being late on the staff payroll because an unexpected bill. A cash flow forecast allows you to anticipate where your cash will be at any given time, ensuring there are no unwelcome shortfalls.
Through sound cash flow management you will always have enough cash in the bank to promptly pay creditors. Everyone likes a reliable business partner. Having a reputation for being trustworthy will make you more likely to obtain trust-based benefits, such as loans and credit, in the future.
As the owner of a business you have a legal responsibility to make sure you don’t trade while insolvent. The best way to do this is to understand and plan for your future cash flow to make sure there is always enough in the bank.
Capitalise on the good times
Whether it’s expanding your service offering, relocating or renovating, if you can predict your cash flow you can plan ahead for investments to ensure you take that next big step when you’re flush with cash.
Managing your cash flow isn’t just about managing your bottom line. A cash crisis can be emotionally devastating. Having control over your cash flow means your staff never have to worry about a late pay check. You also won’t have to worry about explaining a crisis to your creditors.
Time to start planning ahead
The good news? We’ve done all this before and know how to formulate a strategy so that the only surprises you get are good ones.
Of course, every business is different and we make it a priority to get to know the complexities of yours. Working on your cash flow management will not only help you avoid nasty shocks, it will help you plan to grow your business.
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without the prior written consent of Finance Matters, which is where this article also appeared.