When your Business Really Needs a Cash Flow Forecast

Cash flow forecasts aren’t widely used by small and medium businesses. They are however universally used by big business, and for a good reason. Why? They are arguably the most important planning document for any business.

There could be many reasons why your business does not use one. One of the most common responses is that management don’t feel one is needed. Cash flow might be fairly predictable and there seems to be a healthy enough buffer in the bank. But it’s difficult to know exactly when that predictability is to end. The unfortunate irony may be that you might not realise you need one until avoidable damage has occurred.

If your business isn’t maintaining a cash flow forecast it is a must to regularly ask whether one should be introduced into your financial management process. So how do you know when having a cash flow forecast becomes a necessity? These are some early signs that time may be now:

The business is looking less like it used to – If you are intentionally making your business look less like it used to, doing so without understanding the potential cash flow implications is reckless. Not only will a cash flow forecast help you understand the expected return on your investment in change, it will help guide the on-the-run decisions that will need to be made along the way. One very important thing to understand is at what point you might need to scale back change costs if you aren’t getting the sales traction you are after.

Winter is coming – This could be literal (think seasonality) or not. There could be growing competition in your market through new entrants. Alternatively, your core customer’s industry might be suffering. Overall, your view of the market future looks more challenging than it was in the past.

Debtor profile changing – You may now be doing the bulk of your work for a handful of clients. What would the impact be if one of them hit the wall? What if your debtor days went from 40 to 60?

Predictability to volatility – It might be becoming harder to pick the good months from the poor ones. If you are doing more project related work this is likely to be the case. Timing any discretionary spending and owner returns will now be more challenging.

Investment plans – Are you building towards a new investment? It could be business (new equipment, relocation costs) or new personal wealth building investments. If this investment is time critical it is important to have confidence the necessary cash will be there when it is needed.

The clear theme from the points above is that more business planning is needed in periods of change to manage new and increasing business risks. Your previous financial management approaches will not necessarily work in more challenging times, or if you want to capitalise on new opportunities.

As a final point, if the thought of setting up the forecast is what is holding you back, don’t let it. A high-level forecast considering your core income, costs and investments of the business will have you far more prepared for future challenges than you would be with nothing. The planning process is as valuable as the outcomes.

David Edmunds is SiDCOR’s in-house Financial Analyst; focusing on business transactions, financial statement analysis and forecasting.

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