The importance of forecasting your cashflow
23 October 2017
An estimated 82% of small businesses fail each year because of either negative cash flow, or lack of understanding of their cash flow. While this is a frightening statistic, there are plenty of ways that you can ensure you don’t wind up as part of this majority. To keep a firm grip on your cash flow, you need to be forecasting your figures. By doing so, you can see where you stand at a moment’s notice, and see how your business is performing against your previous year, targets and predicted results.
The more you forecast, the more you’ll understand the inner workings of your company. Without these projections, do you know if you’re going to hit your goals? Will you be proud to present your results with your board or are you dreading the thought of it? So, with this in mind, here are our top five reasons to be forecasting your cash flow.
1. Feel secure in your decision making
This is something we all need: security in the decisions we make. In life and business, we all need reassurance. Using a cash flow forecast can do exactly that for you. You’re working from actual data, pulled in from the cloud so you know it’s up to date and accurate. Your key financial data is recorded, and using this data FUTRLI will create a projection of how you’re likely to perform in the next period.
For example, let’s say Christmas is approaching – a notoriously busy spell. You need to know how much stock to order in, whether or not you can afford to employ some seasonal staff, and what your bottom line will look like come January time. Not only this, you can share your dashboards with your managers, and team if you see fit. Being transparent with your figures allows the entire company to be on the same page, and work harmoniously towards the same goals.
2. Save time
Save time so you can concentrate on upping your cash flow. You should expect to spend some time in the office still, but a significant amount less than before. Forecasting in the cloud is flexible and user-friendly, and spending an amount of time becoming familiar with the platform you use to project your figures is going to see a return on your invested time very quickly.
A good example of this comes from Naren King, who owns a popular tourist spot in Australia. Since founding the company he’s made the move to paradise (also known as Bali), yet can still keep very tight reigns on his business. His company, Crystal Castle, has three main revenue streams, so things could get a bit confusing when he went to analyse his data. Designating every team member with appropriate key performance indicators (more on those later) not only unifies them in their roles, so they work towards the same goals, it also allows him a granular view of where every penny comes from. Read the full case study here. Naren told us:
“I now review my entire company’s performance for the past month in 30 minutes – it used to take eight hours!”
It really will make that much difference to your day to day. Some business owners working long hours say they struggle to fit in financial analysis — or even planning. But a small time investment will see your workload decrease over time. You can either put it off for even longer, or make decisions that are potentially based on errors. Both end in more work overall and your plan is only as truthful as the numbers in it. Getting it right first time is crucial.
3. Focus on growth
While historical reporting has its benefits, it’s far more important to be looking ahead to the future. Ask yourself what your business goals are for the next quarter, or even year, and use your forecast to get there. It isn’t a crystal ball, but it will give you valuable insights into where your business stands, and where it’s headed.
Let’s say you’re planning to expand to a larger premises, and soon after that hire some more staff. If you’re relying on historical data, this is a big gamble that may result in the failure of your company. If your accounts aren’t healthy enough to support growth, your forecast will alert you. It’s a really powerful tool that trail blazes the path to success, if you let it. A forecast is comparable to a GPS: it’ll guide you past obstacles in a way your fixed budget can’t.
4. Plan the next period accordingly
It can be a challenge to keep up with your inventory, but it’s very important and will, to an extent, mirror your cash flow. Supply won’t always meet demand, and vice versa. You need to be able to measure what’s selling and what isn’t, per period or seasonally. There’s no sense in ordering enough Christmas decorations to fill 400 houses if you’re an SME retailer, for example. You’ll find you need to flog it all via a sale, meaning you’re losing out on precious cash.
Consumers can be fickle, so it’s imperative to have insight into how much stock you’re holding in real-time, and you can even program your forecast to let you know if you’re running low. Imagine pairing this with the knowledge of when it’s likely to get busy, or quiet. By using a cash flow forecast, you’re setting your business up to not just cope, but excel at ordering, selling and preparation.
5. Keep on top of your cash using KPIs
While this is our last point, it certainly isn’t an afterthought. Granular reporting allows you to set KPIs for actual and forecast data. So once a forecast has been created, you’re able to create reports (as well as alerts) that allow you to stay informed and abreast of key changes. These metrics break down your business into digestible chunks — perfect if you have a couple of different departments to monitor. If you’re seriously lagging with actual results, compared with your projections, the granularity will display the issues. But don’t just take our word for it, as our community of business owners all shout about the benefits of KPI measurement. This in turn allows you to save every penny of your cash flow to do with what you please.