Cash Flow Forecasting: 5 Reasons Why It’s More Important Than Your P&L
One of the best lessons I ever learned working for a private equity-backed company was the value of a 13-week cash-flow forecast. Let me tell you: There is a reason the smartest financial engineers in business always have them.
Why? Because the 13-week cash-flow forecast is a pragmatic tool that will both show you cash peaks and valleys and tell you where to take action to change the outcome.
So while P&L budgeting helps you remain profitable to ensure a long-term future – and is vital for success – cash-flow forecasting, on the other hand, helps you make sure you have the right amount of cash available.
In other words, it puts you in the driver’s seat to deploy your most precious asset strategically rather than reactively. And that just scratches the surface.
Five Mission-Critical Reasons to Improve Your Business Cash Flow Forecasts
For a business to grow, its infrastructure has to be prepared to support it. All too often, businesses aren’t planning their future cash-flow forecasts properly so they uncover short-term cash deficiencies – and this is not a good surprise.
Why? Because even a business that’s growing and experiencing strong sales can quickly have more money going out than coming in – and could fail as a result, despite the increase in sales.
It’s important to know where you’ve been to determine where you’re going – and how to get there. By closely monitoring and understanding prior trends, such as how many days it takes your customers to pay, you will have foresight into the future. Crystal balls and uncomfortable surprises are replaced with clarity and peace of mind.
Cash flow forecasts build confidence for owners, investors and banks because they provide visibility and control. And with a host of goals for your business as you enter the new year, one of those goals should be to ensure your investors have confidence in their decision to invest in your business. Creating confidence is more than just painting a rose-colored picture of your business.
It’s about honestly disclosing the ups and downs – and not being afraid to ask for help when necessary. This warts-and-all approach demonstrates to your investors that they made the right decision when they placed their bet on you.
Cash flow problems don’t just resolve themselves. Having a good cash-flow forecast gives you the insight and time to adjust course before running aground or missing an opportunity. With it, you can better understand what’s on the horizon so you can address both issues AND opportunities that may arise.
Plan and prepare and project as we might, in business as in life, not everything is within our control. Beyond your control? Costs going up, customers spending going down – but there are elements within your control. By getting accounts receivable paid earlier or slowing down payments to vendors, for example, you can positively impact your cash flow over time.
While it’s easy to see the importance of an accurate 13-week cash-flow forecast, it can be difficult to execute one – but at CFO Alliance, we can help! We know you have a mile-long list of goals and initiatives, and rarely enough hours in the day.