The Importance of a Cash Flow Forecast for Your Business
A cash flow forecast is an essential tool in the arsenal of any successful business, but for trade and construction businesses, where costs and income can fluctuate dramatically, it's especially vital. Cash flow forecasting isn’t just about numbers on a spreadsheet. It's a vision into the future health and viability of your business. The only thing worse that having poor cash flow, is not knowing what the future of your cash flow looks like!
Below, we'll dive into the ramifications of neglecting cash flow forecasting, and reasons why your business should prioritise it.
Consequences of Neglecting Cash Flow Forecasting:
- Financial Blindness: Without a forecast, your business is operating in the dark, unaware of potential financial pitfalls ahead.
- Insolvency Risk: A sudden unexpected cost or a dry spell without work can cause anxiety and stress particularly if you haven’t planned your cash reserves.
- Missed Opportunities: Growth requires capital. Without insights from a forecast, your business might miss potential opportunities if it doesn’t have cash reserves.
- Reactive Rather Than Proactive Management: Operating without a forecast often results in a reactive approach to business challenges, rather than a proactive one.
The Key Reasons to Prioritise Cash Flow Forecasting:
- Understanding Income and Expenditure Patterns
- Predictability: Trades businesses often deal with a mix of regular contract work and unpredictable call-outs. A cash flow forecast offers insights into the ebbs and flows of income, helping your business to anticipate lean periods and boom times.
- Expense Management: Your business operations come with a myriad of expenses, from equipment and vehicle maintenance to staff salaries and more. A forecast allows businesses to track these expenses in relation to income.
- Ensuring Solvency:
- Staying in the Black: A clear overview of cash inflows and outflows ensures that your business doesn’t spend more than it earns.
- Handling Unexpected Costs: Business emergencies, equipment breakdowns, or unexpected invoices are better managed with a buffer. A cash flow forecast can highlight when and where these buffers are needed.
- Facilitating Growth:
- Investment Opportunities: For a business looking to expand, whether it's new equipment or an expanded workforce, a forecast provides clarity on when and how much can be safely invested.
- Loan Approval: Financial institutions look favourably on businesses that can provide a clear cash flow forecast. It demonstrates responsibility and a keen understanding of your financial health.
Updating the Cash Flow Forecast:
For most businesses, a monthly review is a good starting point. It offers a balance between staying updated without being overwhelmed by frequent analysis. However, if the business takes on a significant contract, loses a major client, or incurs an unexpected large expense, updating the forecast more often is essential.
For a complimentary 13-week cash flow forecasting tool, contact the team at PROTRADE United.
Written by Jon Mailer
PROTRADE United
CEO& Founder
