Why you should have a cash flow forecast
Jun 10, 2020
Cash flow forecasting is critical in any business but lots of people neglect this area.
Imagine for a moment that you are wanting to buy a new car but you don’t have the cash for it. You look at the options – you could lease, which would be more expensive but would only mean a monthly outlay, or you could save up to buy the car outright. For each option, you would look at how you would save the money, or whether you could afford the monthly lease repayments.
You might look at your household budget, if you have one, or make a guess based on your bank balance, or just decide without looking and say you will put any shortage on your credit card.
Without planning, this could lead to significant debt. You might choose a car that is more expensive than you can afford, or have monthly payments you can’t meet.
It’s the same with having a cash flow forecast in your business. How do you know whether you can afford to employ someone, take on office space, go to an event, run an event, buy that coaching programme? If you don’t have a plan as to how you will afford it, you may well run into debt, and you want to avoid accidental debt (this is a whole other blog post!) in your business.
If you have a cash flow forecast, you can see when key payments are due, like VAT, corporation tax, payroll and any payments in as well. You need to look at what you plan for your sales and expenses to be each month so that you can look to the future.
It’s also critical for getting investment in your business to grow. You will need to show how the investment will help your business grow and what returns the investor needs. Think Dragons Den! When it comes to the numbers, many people come unstuck when they are challenged about how they are going to make the sales they are predicting. Investors will just say “I’m out!” if they can’t see clearly how they are going to make the money back.
It’s the same with loans, banks also need to know how you are going to pay back the loan. The recent Coronavirus Business Interruption Loan Scheme (CBILS) needed all this information, and although the Bounce Back Loan Scheme (BBLS) doesn’t, you need to know that you can pay back what you borrow, as it’s not free. That’s partly why it is capped at £50k and 25% of your revenue so you don’t overstretch yourself.
You need to know your numbers so that banks and investors can have a meaningful conversation with you. And if you don’t need investment or loans, knowing how long your own money will last is also key.
Finally, if you are starting out in your business, launching a new product or service, you need to be sure it is going to be profitable, otherwise it’s not worth doing. This is not a hobby, it’s a serious business that needs to pay you and other people in your team. Remember “investing” in your business without a plan is just using your business as a very expensive hobby.
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