4 Reasons Your Business Needs a Cash Flow Forecast

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You’ve probably heard that the biggest cause of business failure is cash flow problems, but how serious is this pervasive problem? In other words, more than 80% of businesses fail because they don’t have cash, 20% of small businesses fail within a year, and half within five years.

But it doesn’t have to be that way. In fact, many businesses can avoid cash flow problems with proper cash flow forecasting. Cash flow forecasting helps businesses predict when problems may arise and allows them to act proactively to avoid cash flow gaps.

That said, many businesses are already operating at maximum bandwidth, and business owners don’t care about cash flow forecasting. By the time a business owner suffers a financial setback and realizes they don’t have enough cash to pay, it’s usually too late.

Many business owners don’t realize that a good cash flow forecast can do much more than help a business plan its operations. If you’re still wondering why you should bother with it, here are a few reasons why you should have a cash flow forecast:

Related: Often Overlooked Ways Entrepreneurs Can Improve Cash Flow

1. Help companies avoid cash flow gaps

This is the most immediate and important reason why cash flow forecasting is crucial.

Here’s one of your scenarios: John’s client promises to deposit money by today, but there’s confusion and the bank says John won’t receive the money until next week. John is expected to pay his supplier tomorrow, but since no payment has been received from the customer, he does not have enough money to pay. The cycle continues.

This is why many businesses fail.

Cash flow forecasting can help businesses avoid this. They can use forecasting to predict best-case scenarios, worst-case scenarios, and everything in between. They can then use it to make careful decisions about how much to spend, where and when to spend it.

Businesses may decide to hold off on big purchases if they think the cash may not be coming in. Or they can talk to suppliers and defer accounts payable. Or they could offer customers discounts to pay their bills early. Forecasts provide businesses with the knowledge they need to act and avoid difficult cash flow situations.

Related: 4 Tips for Managing Cash Flow in a Seasonal Business

2. It Helps Get Loans

Loans are an important part of running any business. Financing can help businesses expand, improve their products and workflows, or cover operating costs in a pinch.

However, financing is easier said than done, especially for businesses with few assets or no credit history. In this case, the lender looks at profitability, expenses and cash flow.

Strong cash flow forecasts help businesses demonstrate their creditworthiness to lenders. A business can use its cash flow projections to show that it is worthy of a loan and is a good credit risk. Or, if your cash flow projections indicate otherwise, maybe now is a good time for you to conduct an internal assessment and improve your cash flow position before applying to a lender.

3. Help businesses make better decisions

Cash flow forecasting can give businesses a glimpse into the future. It helps them understand when cash comes in and out so they can better plan for the future and make strategic decisions that fit within the budget.

Suppose a business is considering hiring more employees or purchasing new equipment. A business might look into how much money they have now and think they can afford the extra. But what if the company loses a major customer after a week? Or, what if sales suddenly plummeted due to competition?

These are things your account balance can’t tell you, and the exact reasons why businesses need cash flow forecasts. By understanding their future cash availability, businesses can make informed decisions about when and how to invest in their growth.

Related: How to Protect Your Small Business Against Inflation

4. It helps businesses set measurable goals

Utilizing cash flow forecasting can help businesses set measurable goals to actually improve cash flow and identify paths to better business outcomes.

If the best-case forecast shows that you can increase business revenue by 50% by purchasing new equipment to improve operations, you now have a baseline number.

Or, if you plan to reduce expenses by 20% by cutting some of your business operations, a cash flow forecast can help you understand the business and revenue impact of the cuts, and whether the reduction in financial costs is in line with your decision. You can now set data-driven business goals, understand expected outcomes and measure success.

These are two very different examples, but no matter what your business situation is, cash flow forecasting can help companies set measurable goals.

Making forecasts for your business is easier than you think

Here’s the thing about cash flow forecasting: It’s nothing new, but it used to be a challenging, labor-intensive and time-consuming job that business owners would entrust their accountants to do. The good news is that innovative technology is making cash flow forecasting easier than ever. The new tool now integrates directly with many of the cloud accounting platforms used by businesses, making cash flow forecasting faster, more accurate, and sometimes for free. Start finding a solution for your accounting platform today and see the wonders it can do for your business.

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