Knowledge is power. We all know this, and it’s no different in this instance. If you run out of cash because you have made assumptions incorrectly through lack of knowledge and foresight, your business will become insolvent.
Forecasting is predicting and we all, at some time or other have wished for the skill of prediction. Cash flow forecasting will give you the crystal ball on your cash and the health of your business. Based off actual data to begin with you will quickly see the rhythm and flow of your operating cash and payments and will be able to identify potential shortfalls in cash before they happen. An early warning system if you like.
- Making sure you have enough cash to pay suppliers and employees. Suppliers who don’t get paid will soon stop supplying the business; it is even worse if employees are not paid on time.
- And making sure your drawings and/or owners wages are reasonable and rewarding, without exhausting your business cash.
- Know when to grow your business or make changes. My own example on this is recently we were looking to relocate offices. It was to be a $12k outlay, what with bond and rent in advance. I was able to see that when we were planning the move would coincide with a predicted drop in sales. This drop was due to public holidays and annual leave reducing our ability to deliver our service at the normal rate. It was an awesome feeling, to make risk free decisions whenever we can.
- Spot problems with customer payments – preparing the forecast encourages the business to look at how quickly clients are paying their debts and you can link your forecast sales and easily see when payments have not been made.
The big one… Stress reduction. Having your numbers written down (or typed up) engages the visual modality. When a thought is in your head, you’re not necessarily seeing it, and you’re certainly not seeing it in the orderly manner that you need to be for cash flow. It also just keeps swimming around in a loop and often the problem gains momentum and causes even more stress.
Ahhhhh, that feeling of cash!