Why cashflow forecasting is important for your business
Why it's important to have a good working knowledge of your incoming and outgoing cash
The old adage cash is king is all the more important when in the midst of a downturn, but even in prosperous periods it's important to keep an eye on your cashflow. Many profitable businesses have gone to the wall after cashflow problems.
Poor cashflow is one of the number one causes for businesses to fail. Some businesses can be profitable on paper, earning more than their outgoings, but if the cash isn't in the bank to buy stock and pay staff you'll soon find yourself in trouble.
Good cashflow forecasting isn't just important for your own business management. You may be required to provide this kind of detail if you need a loan from the bank during your first few months of trading. The forecast will allow you to identify the amount and origin of cash coming into your business and the amount and destination of cash being paid out during any given period of time.
Generally you'll produce a forecast for a quarter or year in advance, but during the early stages of trading you might want to do this more frequently, such as a month in advance. When compiling a cashflow forecast it's really important that you don't overestimate your incoming cash.
A cashflow statement shows your business' incoming and outgoing money, enabling you to assess how much money you have at your disposal at any one time.
Here is an example of a cashflow forecast:
|Rates & Utilities||528||528||528||528||528||528||528||528||528||528||528||528||6,336|
|Wages & Salaries||2,750||2,750||2,750||2,750||2,750||2,750||2,750||2,750||2,750||2,750||2,750||2,750||33,000|
|NET Operating Cash Flow||328||2,730||1,223||(17)||2,013||1,107||(347)||2,105||316||(1,304)||1,351||384||9,889|
|Fixed Asset purchases||539||1,299||3,675||5,513|
|NET cash inflow/(outflow)||(211)||2,730||1,223||(17)||714||1,107||(347)||2,105||(3,359)||(1,304)||1,351||384||4,376|
|OPENING BANK BALANCE||1,628||1,417||4,147||5,370||5,353||6,067||7,174||6,827||8,932||5,573||4,269||5,620||1,628|
|CLOSING BANK BALANCE||1,417||4,147||5,370||5,353||6,067||7,174||6,827||8,932||5,573||4,269||5,620||6,004||6,004|