Cash flow Forecast: Why it is so important
Posted 13 May '15
Posted 13 May '15
One of the most important tools when starting out in business is a cash flow forecast. Staying close to your business numbers especially in the early days is vital.
So what is a cash flow forecast?
Generally speaking, a cash flow forecast is a financial tool that predicts where the money comes from and where the money goes to for the business over a future period. The forecast estimates cash inflows and outflows, ultimately allowing you to predict upcoming surpluses and shortages critical for business success.
What are the key reasons a cash flow forecast is so important?
Identifies potential cash shortages – An effective cash flow forecast acts as a great reminder system for when payments are due and more importantly enables you to plan for any potential cash shortages allowing you to make sure effective measures are in place.
Allows you to identify your ‘breakeven point’ – Completing an accurate cash flow forecast will allow you to know exactly how many sales you need to make to cover all costs and overheads of your business. Identifying your cash breakeven point of your business before you start can help to really identify the targets you must meet.
Allows you to identify the key drivers of your business – Building a cash flow from the ground up allows you to identify the key drivers which will be vital for continued business success. (By drivers we mean ‘the things that make you money’).
A tool for growing your business – Your cash flow will determine when you can afford to put on new staff, increase marketing activity or even purchase that next piece of equipment.
Ultimately, a well-constructed forecast will tell you if your business has enough cash to stay alive and thrive through the critical start-up phase and how your cash position will flow throughout that first year.
Once your business is established the cash flow projection can be entered into your accounting software (such as Xero) and used as a great tool to compare budgeted vs actual results to keep you, as a business owner, accountable to your numbers.
Remember cash is king and I am the $100 note.
Luke Gozzard
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