A cashflow forecast is the only way to see how much cash a business owns at any point in time. Financial statements are more accurate overall, but these always take into account non-cash items such as assets and liabilities. WinWeb’s Business Planning software includes a powerful Cashflow tool that will help predict whether your company is going to be cash-rich or cash-poor in the immediate future.
All businesses need to be generating positive cashflow on a long-term basis in order to survive. Operating even a small business is a highly cash intensive process so without a steady inflow of cash exceeding outflow, any business will likely soon face financial difficulty and almost certainly will never grow.
The term ‘cash inflow’ is referring to money coming into the business from customers, lenders and investors whereas ‘cash outflow’ is the opposite and refers to money exiting the business as payment to suppliers, employees and creditors. An important exemption to note is that any purchases made on credit are not recorded as cash outflow until the money actually exits the business.
When conducting a cashflow forecast, remember that having a positive cashflow does not necessarily relate to the profitability of your business. If you find that you have very high cashflow, you are likely to be either producing many products or buying in a lot of stock in order to achieve these sales. This will be having a large impact on your overall profitability. Likewise, even if you are cashflow negative, in certain circumstances you could still be making a profit.
Cashflow forecasting is still a great indicator for the overall health of your business. It will also make you think more carefully about how you might reduce your overheads. If it becomes apparent that you are dealing with the same fixed costs every month, it might be possible to reduce these costs through outsourcing or down-ssing.
Regular forecasting will allow you to gain greater accuracy over time. It is then possible to compare actual figures with your plan and then learn from your mistakes. Patterns may also become apparent, such as seasonal demand for your product.
You can also experiment to see what would happen if you moved a payment or receipt to a different month. Would you be in serious difficulty if an unreliable customer with a major order was late paying you? With Business Planning software you can now start to think about how you would cope with various scenarios if they were to occur.