Like any good business owner, you’ll have a clear idea of what your cash flow position is right now. Your accounts system will give you an up-to-the-minute snapshot of your current financial position – and most likely, you’ll have the key figures in your head anyway.
Many owners manage their finances and make decisions based on their current bank balance, but this is a precarious way to operate. The money you have in your bank only gives you half of the picture, as it takes no account of money that may be due to go out in the future.
So, more importantly, can you say with any degree of certainty what your cash flow position will be in, say, three months? For many business owners – at least those who don’t have a cash flow forecasting solution at their fingertips, this is a much harder question to answer.
Why does cash flow forecasting matter?
Forecasting cash flow is vital because cash is the single most important asset in your business. You may deliver an outstanding service, have a great client list and a healthy order book, but if you reach a point where you don’t have cash in your bank to pay your bills, your business will fail.
In February 2019, Intuit (owner of QuikBooks) conducted a global study into cash flow challenges experienced by small business owners and the self-employed. The study revealed that two-thirds of small businesses have had cash flow issues, and as a consequence, nearly a third have at one time been unable to pay themselves or their employees. In addition, more than 2 in 5 business owners have frequently been at risk of paying their employees late. And according to leading cash flow software solutions provider Fluidly (more on them shortly), 80% of small business failures are due to cash flow problems, and 69% of small business owners have been kept awake at night worrying about cash flow.
Of course, you can’t know for certain what the future will bring, but that doesn’t mean you can’t project forward, make use of what you know, and anticipate different scenarios to prepare for those pinch points all businesses encounter when cash flow is tight.
Forewarned is forearmed!
You wouldn’t drive your car at night without first putting your headlights on. But this is essentially what you’re doing if you’re operating your business without being able to project your cash flow at least three months ahead.
If challenges lie around the corner, a cash flow forecast will give you a heads up and time to prepare – perhaps by reducing your overheads, increasing your revenue or looking at short-term finance options.
The alternative – ignoring forecasting and simply reviewing your figures weekly or monthly, means you’ll be unlikely to spot a cash flow problem before it’s too late to do anything about it.
Perhaps you’re trying to look forward by relying on a spreadsheet solution? Many business owners do it, but using spreadsheets to forecast cash flow is far from ideal. It means having to download information from your bank account – which will be out of date almost instantly and transferring data into complex spreadsheets – which takes time and risks introducing errors. What’s more, using a manual system like this makes it very difficult to plan for potential future scenarios.
The solution? Automate your cash flow forecasting.
Cash flow forecasting software: The easy way to look ahead
Thanks to technology, there’s no excuse for being taken unawares by a cash flow crisis and no need to pore over spreadsheets. A cash flow forecasting software solution will integrate seamlessly with your accounting system, and as long as your accounting software is synchronised with your bank, you can use it to
predict your future cash flow position in an instant.
But forecasting cash flow based on what you know is only the start. In a dynamic business, you’ll constantly be considering options and want a clear understanding of their impact on your cash flow. You might, for example, be thinking of recruiting, investing in a new piece of kit or taking out a loan. Each of these decisions will have short-term and long-term consequences, but factoring all the variables into a spreadsheet forecasting system will be incredibly time-consuming.
A software solution makes scenario planning like this easy. Just plug in all the variable costs for your plans and see the impact on your future cash flow immediately.
There are many cash flow forecasting software solutions to choose from: our own preferred solution is Fluidly. Combining AI with financial modelling Fluidly works with Xero, QuickBooks, Sage and other popular accounting packages. We like it so much that we’re an official partner of Fluidly!
Good cash flow management and forecasting is essential for informing effective financial decisions. If you’re not already making use of cash flow forecasting in your business, let Inca help you. We can advise a software solution that will work with your accounting package, assist you with set-up and configuration, and support you as you learn how to use it.
Get in touch with one of our advisors today.