Cash flow forecasting is very important to the success of running a business - it's certainly not something that should be done once at the start of the financial year and then forgotten about.
Businesses need to regularly review their cash flow forecast to ensure they have a clear picture of their financial health and can make informed decisions. In this blog post, we will discuss the importance of regularly reviewing your cash flow forecast, and explain how it can help you identify potential cash flow problems early and take steps to mitigate them:
Why is regularly reviewing your cash flow forecast so important?
A cash flow forecast is a projection of a business's expected cash inflows and outflows over a specific period of time. However, it's important to understand that it's a projection and not an exact prediction. Businesses are constantly changing and evolving, which means that a cash flow forecast that was accurate when it was created may no longer be accurate. By regularly reviewing your forecast, you can ensure that it reflects the current state of your business and that you have a much clearer picture of your business’s actual financial health.
How can it help identify potential cash flow problems early?
If you notice that your forecast is showing a cash flow shortage in the near future, you can take steps to mitigate the problem. This might include cutting back on expenses, seeking out additional funding, or even postponing certain projects. By identifying potential problems early, you'll have more time to come up with a solution and will be less likely to experience a cash flow crisis.
An example of what can happen when a business doesn’t review their cash flow forecast regularly
A business that specialises in seasonal products that they manufacture created a forecast based on the previous year's sales and didn't review it again until the end of the season. However, during this time there was a change in the market and a new competitor emerged which impacted their sales.
By not regularly reviewing their forecast, the business owner was unaware of the potential cash flow problems that they were facing and was unable to take steps to mitigate them. As a result, the business struggled to make ends meet and was forced to take out a loan at a high interest rate.
It's important to review your forecast at least every quarter, or more frequently if you're experiencing significant changes in your business. By doing so, you'll be able to stay on top of your financial situation and ensure that your business is on solid footing.