Cash is king! We all understand that if a business runs out of cash-on-hand, it cannot operate: it won't be able pay its workers, purchase stock, or cover building lease and electricity charges. However with cashflow forecasting, you can pro-actively keep your business viable.
Cashflow forecasting is exactly what it sounds like - taking an educated guess at your up-coming sales and expenses, to ensure the former can cover the latter.
How often you forecast cashflow depends on the soundness of your business - if your business is struggling, you should ideally be forecasting and revising your cashflow every single day.
Benefits of forecasting your cashflow include:
Identifying potential shortfalls in cash balances in advance - effectively your "early warning system"
Ensuring your business can afford to pay suppliers and employees
Spotting problems with customer payments early, reducing the risk of bad debt write-off's
Keeping current information on hand for stakeholders such as banks and lending institutions
The following will help you to maintain and improve a healthy cashflow position:
- Protect your cash position against revenue surprises by maintaining a cash buffer. A balance equivalent to at least two months of operating expenses acts as an insurance policy against the unexpected.
- Be frugal with your revenue expectations and take action immediately if it looks like sales figures are not going to make you break even.
- Credit checking up front will reduce the risk of customer non-payment. Stipulate clear payment terms on your invoices, and communicate regularly with your customers.
- Every dollar you spend reduces cash reserves. The best way to protect your cash is to create a budget for the spending you know you need, and more importantly, sticking to it.
If you would like to have a chat about your business's cashflow position, please drop us a line - we'll be happy to help.