In addition to your business plan, a set of financial statements detailing your cash flow is essential. A cash flow forecast provides details of the actual cash required by your business on a month-by-month basis.
Business needs continuously change, and your cash flow will highlight any shortfalls in cash that will need to be bridged. Many established, viable, and even profitable companies fail due to unavailable cash.
Proper cash flow management is critical to running a successful business. You must be able to pay bills while awaiting payment from your customers. There are many examples of businesses failing not because of their profitability, but due to poor management of cash flow.
You're in business to make a profit. It sounds obvious, but this key focus can quickly become lost. Without available cash, you won't be able to stay in business. Hence the famous phrase 'cash is king'.
Most businesses experience a delay between your providing their goods or services and receiving payment. It is therefore imperative that you ensure there are sufficient funds in your company's bank account to pay its bills in the meantime – whether these relate to invoices from suppliers, employees' wages, rent, rates, tax, VAT, etc.
Even if your business is profitable, there could be times when you are short of cash. This could be the case if you are awaiting payment for a large order. Usually, this is a particular problem during your first year when you are building up your business and don't have regular cash incomes.
The general principle of cash flow management is you should have more money coming in than going out. To achieve this, you need to speed up your cash incomes (customer payments, interest from bank accounts etc.) and slow down your cash outgoings (purchase of stock and equipment, loan repayments and tax charges etc.) as much as possible.
It can be difficult to affect your outgoings. Extending your credit terms with your suppliers is one option, but your employees and suppliers might not appreciate you delaying payment to them. There are, however, other options for you to improve your cash flow.
Examples include regular billing, chasing debtors, factoring, negotiating longer credit terms with suppliers, managing your stock effectively (ordering little and often), and limiting your customers' payment terms.
Also, the majority of businesses have natural peaks and troughs. It's important that you put money away during the peaks so that you have funds available during the troughs.
To download our free Cash Flow Forecast template visit our website