Why Your Business Should Cash Flow Forecast

Almost all businesses prepare an annual budget, some going to great lengths to justify increases in revenue, cost reduction targets and capital expenditure requirements.

More often than not, the completed budget continues to receive ongoing attention as a benchmarking tool and key component of the monthly reporting pack.

Now don’t get me wrong, budgeting is an essential tool in any business, and management is justified in spending significant time and energy (and often money) on ensuring that the annual budgeting process is effective.

But how many businesses forecast cash flow? As the vast majority of businesses fail due to inadequate cash flow management the answer is quite obviously “not enough”. And by forecasting cashflow, I don’t mean the annual cash flow forecast which “falls out” of the budgeted profit/loss and balance sheet – I mean effective cash flow forecasting.

What is effective cash flow forecasting?

What this means is a stand alone forecast prepared on a regular basis which has its own dedicated time slot in the daily/weekly/monthly management meeting.

If the very survival of your business is not a good enough reason to consider implementing a cash flow forecast process – and let’s face it, if your business isn’t hanging on by its fingernails, cash is unlikely to be at the top of the priorities list – how about these incentives:

  • A cash flow forecast can predict a business’ ability to generate the cash necessary to fund working capital requirements.
  • It will provide advance warning of a cash shortage (both timing and quantum), giving management time to implement a mitigation strategy.
  • It can assess the ability of a business to fund an acquisition or expansion of existing operations.
  • Cash flow forecasting will indicate when management should consider downsizing or consolidating the business.
  • It can assist management in achieving steady growth without over-trading (i.e. accepting work which a business is not capable of completing due to working capital constraints).

So who’s ready to start forecasting? Stay tuned for my next blog when I will be looking at how to design a cash flow forecast appropriate to your business.

Post your questions and comments and I’ll get back to you.

Elizabeth Mawby was a former senior executive at Vantage Performance, one of Australia’s leading turnaround management and profit improvement firms – solving complex problems for businesses experiencing major change.


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