Back to Blog
There is this notion among modern entrepreneurs that their business success is measured by the profit they generate, whereas in actuality, there are quite a number of factors that determine the true value of every business. Cash flow is one of the key factors.
So, a business’ cash flow is the money that flows in and out of the business in a specific time and it generally affects the liquidity of the business. If you have a negative cash flow, then it only means that the amount of money that has been received by the business is less as compared to the amount that was spent. And if you have positive cash flow, it means the business received more money than it has used. That being said, positive cash flow is what a business needs for it to be sustainable in the long run.
Even if a business makes enormous profits and is unable to effectively manage their cash flow, it is doomed to fail. The reason being, the inability to manage the cash flow means that the business is struggling to pay its suppliers, which in turn leads to delays in product delivery. All these lead to the disappointment of the customers and thereby impacting your business negatively.
Having said that, cash flow forecasting helps the owner to manage money is a way that the business will be able to pay off all its loans and bills on time. What’s more, it protects the business from major financial shortages, which could prove detrimental to its success.
So, how does cash flow forecasting help a business grow?
It is true that many businesses in the UK experience some cash flow problems at one point in their existence. The unfortunate thing is that the majority of these businesses collapse. By failing to allocate money properly, the owners set their business up for failure. So, when it comes to running a growing business, there are a number of decisions entrepreneurs are supposed to make in terms of aligning the finances with key decisions, so as to ensure its success.
Cash flow forecasting helps the business owners manage their resources effectively, thereby improving their business returns, performance, and growth. Cash flow management is extremely crucial when it comes to making decisions. For instance, as a growing business, there will reach a point where you would want to move into a bigger office or maybe hire additional employees. Now, when you reach this point, making the decision based on the amount of profit you generate only could be outright misleading. You see, due to the bulk selling of wholesale businesses, they tend to have large sales, but on the other hand, the customers can be pretty slow in paying them, resulting in negative cash flow. So, if such a business was to make a decision based on their profit, they would later have a shortage of money when making actual payments to their suppliers.
The other way cash flow forecasting influences business growth is by identifying and understanding the gaps in the flow of cash. Business with cash shortfalls mostly identifies weaknesses in the processes because of cash shortages. By using such revelations, the business is able to implement solutions or improve processes to cover cash shortfalls, thereby enabling the owners to improve the performance and growth of their business. Also, this way, they are able to maintain steady growth without any delays.
Another thing, when considering the break-even to net profit, profit margin, and operating margins, a slight miscalculation of prices and discounts could lead to a shortage of resources required to finance business operations. Cash flow forecasting is a major component of the pricing strategies. So, when you use strategies such as reduced pricing or discounts, you boost the cash flow, and if you were to combine these strategies with a couple of others, then be sure that your business will become a cash-generating machine in no time.
Also, cash flow forecasting extends its benefits to other aspects of the business. For instance, it helps when it comes to debt management. Also, it gives the business the strength as well as the capabilities required for it to thrive. This is especially so in terms of business infrastructure, inventory, and assets. What’s more, cash flow forecasting provides the much-needed insight on the amount of money the business should invest in the research and development of new products that could drive the sales up. And lastly, the forecasting gives you some insights on the amount of money you should put into training the employees so as to drive up overall productivity.
So generally, proper cash flow forecasting gives you a firm grip on your business’ liquidity, thereby giving you an opportunity to make it stronger. The more liquid a business is, the more likely it is able to position itself in a more proactive and strategic manner in the market. These proactive and strategic approaches enable the business to pass through all the stages of growth victoriously, thereby making the business to become not only more profitable, but also more viable in the future.