Cash Flow Forecasting

Cash flow forecasting or cash flow management is a key aspect of financial management of a business, planning its future cash requirements to avoid a crisis of liquidity.
Poor cashflow management is the primary reason for a vast proportion of business failures. Many profitable companies find that they are, for all practical purposes, insolvent – simply because of uneven cashflow. Cash flow forecasting is all about looking into the future not assessing the past.

Why cash flow forecasting important

When a business runs out of cash it is becoming more difficult to obtain new finance and this will most likely lead to a business becoming insolvent.
With the number of tools available today there is little excuse for management to claim that they didn’t see a cash flow crisis coming.

Cash Is King, cash is vastly important to a businesses – particularly in the start-up sector and in small to medium size enterprises.
As a result, it is absolutely crucial that management forecast what will happen to cash flow, to make sure the business has sufficient fund to operate and moreover to remain solvent.

Key reasons for cash flow forecasting

1.    Important in Identifying  potential shortfalls in in advance – think of the cash flow forecast as an “early warning system”.  This is, by far, the most important reason for a cash flow forecast.

2.    Make sure that the business is in a position to pay suppliers and employees.  Unpaid suppliers will quickly stop supplying the business; it is even worse if employees are not paid on time.

3.    Spot problems with customer payments – preparing the forecast encourages the business to look at how quickly customers are paying their debts.

4.    As an important discipline of financial planning – the cash flow forecast is an important management process, similar to preparing business budgets.

5.    Banks and other funders may require a regular forecasts to ascertain that their investment is safe.  Certainly if the business has a bank loan, the bank will want to look at cash flow forecasts at regular intervals.