5 common cash flow forecasting mistakes to avoid

Wednesday 15th March 2023

Cash flow forecasting is an essential part of managing a business, yet many businesses struggle to get it right. Inaccurate cash flow forecasts can lead to problems and financial distress. In this blog post, we have outlined 5 common cash flow forecasting mistakes that businesses often make, and explain how to avoid them:

1. Not considering all sources of cash: Many businesses only focus on their revenue when forecasting cash flow, but it's important to also consider other sources such as loans, investments, and government grants.

2. Not accounting for seasonality: Many businesses have fluctuations in revenue throughout the year so it's important to take this into account when forecasting so you don't end up with a cash shortage during your slow season.

3. Not considering the impact of inflation: Inflation can have a significant impact on cash flow, especially over the long term. Be sure to factor in the potential impact of inflation to your forecasts.

4. Not considering the impact of taxes: Taxes can also have a big impact on your cash flow, especially for small businesses.

5. Not regularly reviewing and updating your forecast: Your business and market conditions are constantly changing, so it's important to regularly review and update your cash flow forecast. This will help you identify potential cash flow problems early and take steps to mitigate them.

Whether you're just starting out or have been in business for a while, by avoiding these common cash flow forecasting mistakes you can increase the accuracy of your forecast and make better decisions for your business.

An example of what could happen when making a mistake forecasting cash flow:

A retail business forecasts that they will have a steady cash flow throughout the year and therefore decide to take on a large inventory purchase. However, they failed to take into account the impact of seasonality on their revenue. As a result, they end up with a large amount of unsold inventory during their slow season, which leads to a cash flow shortage.

In order to make ends meet, the business is forced to take out a loan at a high interest rate. This puts the business in a financial bind and they are unable to invest in necessary improvements to their business. The business may also need to lay off employees and cut back on expenses.

This is just one example of how cash flow forecasting mistakes can have a negative impact on a business. By over investing in inventory after not accounting for seasonality trends, this business is now facing significant financial difficulties.

It's important for businesses to take the time to create accurate cash flow forecasts and to regularly review and update them to ensure they have a clear picture of their financial health and can make informed decisions for your business.

Interested in boosting your business' cash flow? Find out how Novuna Business Cash Flow can help

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