Managing cash flow is a vital part of running a successful business. Some business owners think managing cash flow simply means keeping track of how much money enters and leaves their business, but there's actually more that goes into it. Cash flow forecasting, for example, is an incredibly valuable tool that helps you anticipate cash flow issues, plan for days when your cash flow is limited, and show the bank that you are prepared. It's an important process that you shouldn't ignore. Here are some ways cash flow forecasts help entrepreneurs.
They help identify cash flow issues before they happen
Most businesses go through slow periods. Sometimes, those periods are obvious. A seasonal business, for example, will have decreased income during the off-season than during the on-season. There can be less obvious peaks and valleys in your income, though, that you have to prepare for.
Your cash flow forecast can help you monitor your day-to-day cash flow and anticipate when times will be slow before they hit. By anticipating when the cash coming into your business might be light—or when you might have to spend more than you're accustomed to—you can avoid a cash crisis.
By examining your cash flow over the previous years and forecasting your future cash flow, you can better anticipate financial cycles and how they affect your bottom line.
They help plan for tougher times
It's tempting to spend money when you have a lot coming in. Your business may need new equipment or maybe you want to give all your employees a raise or a bonus.
That's a great thing to do, but it's only helpful if it doesn't put your business in jeopardy financially.
Cash flow forecasting is a great reminder about how your bank accounts will look during tougher times, so you can make important decisions about when to spend your money and when to save it.
If you know a slow period is coming up, it might be better to save your money for now and give out smaller bonuses. If you can anticipate your slow period, you can plan major purchases and bill payments around it, to stretch your cash further. At least by conducting cash flow forecasts you're less likely to be surprised by a sudden cash-flow crisis.
They show banks you can plan ahead
Banks prefer to give their money to entrepreneurs who show they are capable of planning ahead. Financial institutions prefer business owners who are realistic with their financial projections and show they have a means of addressing cash flow issues.
Forecasting your cash flow gives you a clearer picture overall about your business and how the money moves into and out of it. It provides important insight into your company's financial health.
If you haven't conducted cash flow forecasting so far, it's a good idea to get started now so you have a better understanding of your company's finances and so you can prepare for the future.