If you aren’t already doing a cash flow forecast you probably know that you should be. But maybe you occasionally wonder why a cash flow forecast is important to your accountant, or why your bank manager wants to see one, your why your investor keeps telling you to show them one.
A cash flow forecast means different things to each of these different people and so in this post we are going to tell you exactly why each of them values it as a business tool.
Why is cash flow forecasting important to your accountant
Because understanding cash is vital to planning. And your accountant loves planning!
Chances are when you have a question about whether your grand plans are affordable or not, you go to your accountant.
Whatever your route to achieving your big plans, a cash flow forecast is the start of that journey.
What happens next is that your accountant will look at your projected incoming cash and outgoing payments. They will play with different scenarios. And they will then present you with a number of different paths based on a number of different assumptions.
Maybe you need to increase your sales. Or maybe you need to increase your prices. Or perhaps you need your processes to be more efficient.
Whatever your route to achieving your big plans, a cash flow forecast is the start of that journey.
Why cash flow forecast matters to your bank manager
Because your bank will only help you if they trust you, and being on top of your numbers will earn their trust.
There’s basically two reasons why you might want a loan from the bank: a long-term investment or a short-term bridge.
If you turn up to the bank out of the blue and ask for either of those, prepare to be told no.
Being on top of your numbers will earn the trust of your bank manager.
But if you are doing regular cash flow forecasting, you will be able to see any nasty dips into the red before they happen. Flagging these potential “cashtastrophes” with your bank manager well in advance and then avoiding them without the need for a loan will give you a reputation for being a steady, conservative businessperson.
Then when the time comes when you absolutely definitely need a loan, the conversation will be much more positive. And when they need to see a cash flow forecast in order to approve the loan, they will know that it is credible because of your past actions.
Why a cash flow forecast is important to your investors
As a business owner or CEO, you are probably thinking about the future quite a lot. But the truth is, you are also caught up in the day-to-day running of the business in a way that investors simply aren’t.
And this means that investors are thinking about the future a lot more than you are!
A cash flow forecast makes an investor happy for a variety of reasons. Firstly, because it is best business practice to be on top of the cash, a forecast is an indication that you have a steady hand. Much like with the bank manager, your investor will be more disposed towards trusting you.
Secondly (assuming you are revenue generating) most investors will be looking for fairly aggressive growth and this means running a lean financial operation. This is less about running out of cash and more about demonstrating you are investing the cash you have into growth.
Finally, because they are so focused on the future, they want to see what is and is not affordable. Especially in a high-growth situation the big questions centre not around what opportunities should be pursued but around which opportunities should not be pursued. Understanding the future cash situation is one of the parameters that can help make those decisions.
Now that you understand why these different stakeholders are interested in your cash flow, you might want to read about why you should be interested in cash flow forecasting!
How to do a cash flow forecast?
You could build a cash flow forecast in Excel – there are plenty of templates available through a quick Google search. However, these will be hard to maintain and can be very error-prone. A way to avoid that hassle is to use a cash flow forecasting tool like Float to connect to your accounting software and automatically import your accounting data every day, saving you heaps of time and letting you focus on your bit – entering an accurate forecast.
