It’s often said that ‘turnover is vanity, profit is sanity, and cash flow is reality’. Good cash flow management is the key to business success. Businesses that do not keep a close check on cash flow and cash flow forecast – even when turning a profit on an annual basis put themselves at risk.
Poor cash flow management can cause ‘on paper’ successful businesses to fail because when a problem occurs, they do not have the financial means to implement contingency plans or deploy additional resources. If underperformance is not spotted quickly enough, the damage to the business can be fatal.
However, the importance of good cash flow planning goes beyond the black-and-white of life and death for businesses. A good cash flow gives a business greater agility to make strategic decisions and capitalise on opportunities and improves the financing terms it can secure, and builds corporate reputation. So, instead of focusing merely on month-by-month solvency, a business can invest in growth and technology, take on new staff, develop new products and services, and diversify its market. A business with a poorly managed cash flow may survive for years or even decades, while never truly reaching its full potential.
The Principles Of Good Cash Flow Planning
So, with cash flow forecasting and planning so important, how can you improve this aspect of your financial management?
Managing Unexpected Expenses
Unfortunately, unexpected expenses or interruptions to your income stream are everyday occurrences for many businesses. A cash flow plan can help you to stay in control of your finances and ensure funds are available to plug the gap should your income fluctuate, or your expenditure unexpectedly increases.
Improving Financial Resilience
A cash flow plan will give you an insight into your finances, so you can take steps to reduce costs by eliminating unnecessary expenditures. This will improve your business’s financial resilience and insulate it against unforeseen risks and threats in future.
Planning Ahead
If you’re looking to grow your business, you could require a sizeable cash injection from borrowing or accumulated reserves. The decision to expand your operations can only be made when your business is on a stable financial footing, so you do not overstretch your finances and stimulate a cashflow imbalance. An accurate cash flow forecast will give you confidence in your company’s financial stability and help you make the right decisions at the right time.
Reducing Risk
Anticipating the threats to your business is vital to ensure your company’s preparedness and enables you to put contingency plans into action. However, with a detailed and regularly updated cash flow plan, you will be equipped to respond promptly to emerging problems and make informed financial decisions to protect your business and mitigate your risk level. You will also be able to demonstrate to investors and customers that your company is effectively prepared and that it is a ‘safe bet’ for their money.
Using Software For Cashflow Forecasting
Tracking your business’s cash flow manually on Excel spreadsheets is notoriously difficult and prone to errors. Because of the time involved in updating spreadsheets, data is likely to become obsolete quickly. The best cashflow forecasting software will help you to create a cashflow plan that works for you by giving you the access that you need to make informed financial decisions for your business’s growth and profitability.
Contact Us To Find Out More
If you would like to improve your business’s cash flow forecasting and management, please download our free Integrated Financial Planning Guide or call our friendly team on 01242 578966.
Image Source: Canva