The above is a well-known phrase and with good reason; cash is the #1 reason for business failure!
If a business runs out of cash and is not able to obtain new finance, it will become insolvent. No matter if it could well have been profitable in the long term. It’s therefore vital that before you launch your business that you forecast your cash flow, here’s why:
Identify potential shortfalls in cash balances in advance
If your cash flow forecast identifies some areas of concern, you may be able to direct the business away from trouble, for example; obtaining a bank overdraft or negotiating payment terms with your suppliers and/or customers. This is the most important reason for a cash flow forecast.
Decide what payment terms to offer
Offering payment terms can have a significant impact on your cash balances. Cash flow forecasting can allow you to see the potential impact this will have.
Please note; this is not an issue for businesses, like retailers, that take payment at the point of sale.
Set yourself sales targets
When preparing your cash flow forecast you will have to predict the amount of sales that you expect to achieve. This can be a real motivator for you when you start in business, try to beat your predicted sales each month.
See the effects of seasonality
Seasonality affects more businesses than you might think. Don’t just consider the changes in weather, there are other factors that impact on your level of custom. The Christmas period is a good example of this; does it generate more or less custom for your business?
External stakeholders may require a regular forecast
Interested parties, such as loan providers, may want to look at cash flow forecasts at regular intervals.
If you’re a student or graduate of Newcastle University, Rise Up can help you to construct a cash flow forecast for your business. Please contact us if this is of interest to you.