Cash Flow Forecasting – Knowledge is Power

“The more a business owner knows about their cash flow, the more empowered they become”

A tale that we often hear when talking to owners about their businesses is that of a great product or service, capable staff throughout the company yet there is a constant feeling of frustration that despite being profitable, cash flow often feels squeezed.

Many studies have been carried out around the biggest worries facing business owners and cash flow concerns is consistently in the top three. This is no surprise given a failure to manage cash effectively can be fatal to your business.

A short-term cash flow forecast is a valuable tool to help minimise this worry. The cash outlook is always high on my agenda when I visit a new client and if they, like an estimated 33% of their peers, don’t produce a forecast, we will sit down together to create one as an immediate priority.

There are a variety of benefits to producing a regular short-term cash flow forecast:

Cash vs profit

Many owners believe that profit is what matters most. However, it can be the case that a profitable company still does not have adequate cash flow. This can often occur when the company’s working capital cycle is not managed effectively. Research has shown that UK wide, 37% of small businesses run into cash flow problems due to not receiving customer payments on time. A three-month cash flow which is produced and reviewed on a weekly basis will allow a greater understanding of the relationship between profit and cash.

Help understand and manage risk

By producing a regular short-term cash flow, you see well in advance when you may have a cash shortage that will need to be managed effectively. It can also give you enough time to act to ensure any cash flow troubles do not escalate into deeper problems. This may include the ability to access better loan rates or tighten up payment terms to bridge the gap.

On the reverse side, if your short-term cash flow forecast shows that you will have a large amount of cash in your bank account then this will allow you to explore options to potential reinvest for growth or look to extract value for shareholders.

Understand your working capital cycle more effectively

A regular cash flow forecast will allow you to pinpoint who is consistently paying late and use this information to enhance your credit control process and make more informed decisions around that customer. This will also allow you to gain a deeper understand of your company’s working capital requirement and the cash profiling when making decisions around the company. This could include the decision to invest in a new asset, move premises or invest in new staff as an example.

Improve communication channels with your wider team

An often-overlooked point around cash flow forecasting is that it helps strengthen communication between various staff within the business. Regardless of the size of your company, various people will require input into a cash flow forecast. This may be as straightforward as the company’s bookkeeper or in a larger organisation input from credit control, account managers, general managers and also input from operations and sales teams.

Stakeholder management

Investors and finance providers are not as close to the business as owners are. As a result, they tend to think in terms of the big picture. Investors and/or finance providers will expect the leaders of the businesses they invest in to maintain a clear idea of the future. Providing stakeholders with a regular cash flow forecast that, crucially, has a track record of accuracy will only endear you to them.

“There is really only one way to address cash flow crunches, and it’s planning so you can prevent them in advance”. Most businesses cannot survive a severe cash flow crisis. Therefore, it is critical that business owners are sufficiently monitoring cash flow to ensure you do not end up in that situation.


Ross McAdam
About the author

Ross joined Craig Corporate in 2021 having previously worked in audit, corporate finance and private equity. Ross qualified as a Chartered Accountant (ICAS) with EY in...
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by Ross McAdam