What is a cashflow forecast and why is it important?

Up to 90% of small business failures are caused by poor cashflow, according to a recent SME survey by Ashley Finance. And this high failure rate comes from a lack of awareness of the cash hurdles that lay ahead on the unpredictable twists and turns of the business journey.

So, wouldn’t it be helpful if there was a way to look forward and to predict the cash inflows and outflows for your business? A kind of ‘cashflow crystal ball’ that could see into the future and give you a sound idea of when cash would be low – so action could be taken to prevent any negative impact on your business plans and profitability.

Well, that’s exactly what a cashflow forecast provides – a way to understand the short, medium and long-term future paths of your cash, helping you make better business decisions as a result.

What is a cashflow forecast?

A cashflow forecast is an estimate of your cash position in the future, making it a hugely valuable tool when assessing the future financial prospects of your business.

Firstly, it’s it’s import to understand what cashflow is – and how monitoring the company’s cash inflows and outflows is key to good financial management and the effective running of the company’s real-life operations.

As an ongoing financial process within the business, the better your view of the short, medium and longer-term prospects of your cashflow, the more informed you are at all points in the business cycle – and when you’re informed, you make more robust business decisions.

How is my forecast built?

Your cashflow forecast is built from a combination of the business’s accounting data and historic actuals, sometimes with the addition of informed assumptions or pre-selected drivers taken from the underlying business model.

This fusion of finance data and key assumptions/drivers is then used to provide a forecast of the future cash position of the company as a whole – broken down into operating, investing and financing activity and brought together into a net cashflow figure.

Whether you use the direct cashflow or indirect cashflow method of calculation will depend on the accounting system you use, the access you have to drilled down financial data and the balance of speed and accuracy you need. With access to modern cloud-based cashflow solutions, such as Fluidly, the greater accuracy of the direct cashflow approach is readily available – and would be recommended for most business users.

Who are the core audiences for cashflow forecasts?

Your CFO, FD and management board will be the core audiences for this cashflow forecast.

As part of a regular monthly management accounting pack, a cashflow forecast is a key indicator of how the business is performing – and what actions may be needed to improve your financial performance in the near future or in forthcoming periods.

Strategic and financial decisions are best made with the most detailed and current data and reporting to hand, so a cashflow forecast keeps your board updated with where your cashflow position is right now, and where it it may sit in future periods.

That view of the future pathway of the business is invaluable, for a number of reasons.

Where does a forecast add value?

Having a future view of cashflow is incredibly important. Before making business decisions, your board will want to know your cashflow status in a month, next quarter, or in 12 months’ time.

Having a transparent view of cash over a given period – live, at any point in time, in real-time –  helps to answer the most pressing business questions. For example:

  • Can you afford that future tax bill?
  • Will you be able to make next month’s payroll run?
  • Will your directors be able to take a dividend?
  • Is cashflow healthy enough to finance wider expansion and future growth plans?

When you can see the operating, investing and finance cashflow mapped out along the business road, it’s far easier to provide solid answers to these queries.

Scenario-planning is made possible too, giving you the tools to run through different contingencies and outcomes and see the potential impact on your finances. By running forecasts or projecting driver-based cashflows forward in time, you can try out multiple strategies and see which will bring the best outcome – and that’s an indispensable advantage.

Why you need a view of the future

Every business would benefit from having a ‘cashflow crystal ball’ to refer to. And your cashflow forecast provides that function – it blows away the mist from the route ahead, revealing the potholes and tripping hazards and keeping you safely on the road.

With access to a detailed cashflow forecast you remove that vulnerability and give yourself the financial vision that will keep you moving forward. In this position:

  • Your board are more informed about your financial health
  • You have an expanded view of your future cash position, and
  • Investors, shareholders or finance partners can see precisely how the business will perform over the coming months or quarters – increasing confidence.

So bringing forecasting into your cash management really is a no-brainer. With access to the latest in cloud accounting and online cashflow solutions, producing a cashflow forecast is incredibly easy – helping you see further down the road, and make better plans for tomorrow.

See how Fluidly forecasts your future cash position