Profits are important and an obvious priority to any businesses; however cash flow management is the integral building block to the success and growth of that business.

Many business owners will put a lot of their time and interest into their profit and loss sheets but may overlook the important information that can be gleaned from the cash flow forecast. Profit and loss sheets do not contain all the information needed to predict how the business will do in the future, if it has the potential to grow and how it might overcome any problems. Even the appearance of a healthy profit and loss sheet could be masking a poor cash flow and papering over the cracks of a future problem, potential business distress, and eventually insolvency.

Profit is of course the difference between income and outgoings; however it only becomes income when a client pays, not when they are invoiced. You know when the client is due to pay but what if they miss the payment date meaning you do not have the money to pay your own invoices? How would your business cope with consistent late payers or a slow sales month? Will you have the surplus cash to invest in your next project or buy new equipment?

The answers to these questions can all be predicted by a well put together and concise cash flow forecast. It is no guarantee of future business performance as there a lot of different defining factors in cash flow management and each business is different, but it will give you the best possible idea of when and how money is coming into and going out of the business, when there might be surplus cash or gaps to fill. The more often you do a cash flow forecast, the more accurate it should become as you learn to read the information it provides.

No matter a business’s size or current position, cash flow forecasting is essential to the day to day running and in turn profitability of the business. They are not only vital for your own planning but will come in to play when seeking any kind of funding or investment. If you can present a well thought out cash flow to an investor or bank you are proving how much you understand your business and how invested in it and committed you really are.

Cash flow forecasts are usually composed on an annual basis but can be done 6 monthly or more often if required, depending on your businesses needs you could even do them daily.

If a cash flow forecast has flagged up the need to find extra finances in a certain month to bridge a gap then it can help you plan for this in advance rather than at the time. Businesses trying to secure funds ‘same day’ will come across as unprofessional and unorganised.

Use your cash flow forecast to run likely scenarios of future trading conditions and events and how your business would fair. You can then put contingencies in place to deal with them if and when they arise.

A good cash flow forecast is an essential document, treat it with high regard and seek professional and impartial advice immediately if predictions indicate cash flow problems or businesses distress.

For more advice on what to do if you are suffering cash flow problems, get in touch today or ask your questions in the comments section below. You should consult your own accountant regarding cash flow forecasts but we can also point you in the right direction for advice on writing and maintaining a cash flow forecast.