The key benefit of factoring is to provide some visibility on a company’s cash flow when it is uncertain its clients will pay their invoices in due time. Indeed, the importance of a cash flow forecast cannot be stressed enough, especially for small enterprises and start-ups. On the positive side, keeping accurate cash flow forecasts has many benefits. On the negative side, not keeping any may have dreadful consequences.
Positive reasons for the importance of a cash flow forecast
Cash flow forecasts tell you one key piece of information about your business, namely, whether it has enough cash to survive or not. This simple piece of information allows you to plan ahead, which comes with many benefits.
Planning, planning and more planning...
Cash flow forecasts allow businesses to:
- Detect possible cash flow pitfalls before they materialise - there’s nothing more dangerous, and sillier, than being in a situation when long-due liabilities cannot be paid for;
- Plan for recruitments and procurement - it’s not easy committing to pay for employees and suppliers when you can’t plan your finances;
- Identify customer payments problems - just preparing the forecast makes you review your customers’ track record in terms of payment conformity;
- It’s also an important management tool;
- Many banks will require regular forecasts, especially if a loan is required by the business.
... is the key to profits
The importance of cash flow forecast is essential to ensure growth, because it allows for planning.
- Only after employees and suppliers have been paid can you produce goods and services that will generate profit, not the other way round!
- Cash flow forecasting tools will also produce profit forecasts, showing you key metrics such as margins and break-even points.
What may happen when businesses neglect cash flow forecasts, and how to avoid it
The importance of cash flow forecasts stems from the importance of cash flows themselves: they’re the lifeblood of any business! Without cash flow forecasts, the business is at risk of running out of cash unexpectedly, and therefore... to die.
Signs of cash flow problems
Cash flow forecasts will tell you when you should watch out for cash flow problems. Without such forecasts, you only know about these issues when problems arise, meaning, when payments can’t be honoured. That’s why numbers on an Excel spreadsheet are cool, but insufficient as they are not highlighting the key indicators which will tell you exactly where to pay extra attention before problems arise.
When things go from bad to worse...
If cash flow forecasts have not been implemented, deferred payments and even more loans to pay for loans to cover deficits can quickly snowball and lead the business to bankruptcy. In fact, a lack of positive cash flow is the most common reason why companies close their doors.
Easy steaps to build cash flow forecasts
It’s not really difficult to build basic cash flow forecasts, it just requires a little discipline:
- Start by drawing a list of all payments which will have to be made next year;
- Next to it, draw a list of all planned sources of income, like sales forecast over the same period;
- Calculate what you have left at several points in time...
That’s just the basic idea, and of course, as businesses have complex and multiple operations, this simple exercise will make you understand the need for appropriate tools or software.... and the importance of cash flow forecasts.