You have heard many say, "cash is king" or "cash is the lifeblood of every business. This is true. I cannot imagine a cashless business surviving.
In the accounting world, and financial recording is done on an accrual basis. This means that day-to-day transactions are not necessarily recorded on a cash basis or as you would see them on a business bank account. Bank statements normally just provide a snapshot of a business' daily cash movements. As a result, most business owners and their accountants miss the issue of cash flow.
The only time you will see a cash flow report in most businesses is when a set of financial statements has been drafted and a cash flow statements is presented. The challenge here is that the cash flow statement in the financial statements is on annual historical financial information. This information is only going to show you what has been (i.e. how cash was applied in the business) and not what could be (i.e. a forward looking approach to cash flow.)
Why do businesses need a cash flow forecast:
A good cash flow forecast tool is essential because it:
- Is great for planning your business activities
- Enables resource allocation
- Ensures that business activities are correctly aligned with each other
- Supports businesses in making sensible, realistic decisions for business
- Gives business owners greater control over their business finances
- Allows businesses to better understand their business performance
- Helps businesses plan for the future
- Helps businesses in determining their value
- Helps business secure funding
- Helps identify and indicate where the business may go into the red and therefore need a cash injection
- Helps identify and show where businesses may have excess cash and therefore help identify opportunities to invest this extra cash
- Identify debtors that have fallen behind so that, if needed, you can chase these for payment
- Identify creditors whose payments have fallen behind. You can then use this information to negotiate repayment terms, or payment arrangements so that you can maintain good working relationships with your creditors
- Identify where you will have excess cash and therefore decide on what to do with it or if you may replug this into the business in order to grow it
- Identify where funding may be needed and begin planning for this and where to get it. Potential funders may want to see your cash flow past and future, before approving the much needed capital injection.
- By doing a sensitivity analysis, setting a few "what ifs," businesses are able to plan and make important decisions about the future of the business.
Why some businesses and accountants do not have cash flow forecasting tools:
- They are busy with compliance work and have no time to consider the impacts cash has on the businesses they provide services
- There is a feeling that cash flow projection is a complex exercise, so daunting that it cannot be done in a normal working day
- Their reporting is historic and not forward looking
- Some business owners cannot step away from their businesses, and they spend a lot of time with admin related tasks
- The business owner is the shareholder, and he feels all he needs to know is on the bank statements.
- Some business owners do not see the value in getting a service provider to help them with a cash flow forecast.
- Once a cash flow forecast is done, no one hold the business owners accountable in terms of what the projections say
- Other businesses and accountants will only do it on demand (for example, shareholders or the bank need it
What a good cash flow tool can do(examples):
What if scenarios:
What if scenarios helps a business to see what would happen if a certain event happened. In the above graph, the blue line is your normal day scenario (your every day life. The pink line is the what if scenario. In this case, we just wanted to see if we can hire a new staff member what the impact on cash is. I believe that every business should be looking at a graph like this at each board/strategic meeting.
Setting low cash targets/alerts:
Would it not be nice if businesses could see what impact every decision, or every action had on their cash on a daily basis? Would it not be even nicer is a business could see the impact over the next few years? Would it not be nice if you did not have to manually adjust your cash flow forecast spreadsheets in order to see what would happen to your cash in the event of factor "A" or factor "Z?"
When I do my personal budget, I always tell myself, "Keep this level of cash at hand, do not go beyond that else you will go into the red." I think every business needs the same approach. I believe every business should have at least two months worth of running expenses as cash reserves at any given time. It is not good running around.
Would you be interested in cash flow forecasting tools that actually work for your business without much manual intervention? Let me know if you do by following this link.
Originally published June 19, 2019
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.