An estimated 80% of businesses fail because they have not managed their cash flow properly.

Profitable businesses are often among these statistics, simply because owners focus too much on profit and not enough on cash flow. Once a business runs out of cash and is unable to obtain new finance, it is a fast, downward spiral to insolvency.

Cash flow needs to be monitored at every stage of business growth, not just at times when a business is going through a difficult period. The danger of encountering cash flow problems is often greater at times when a business is doing well because of the risk of overtrading.

A cash flow forecast (also known as projection) is a key management decision making tool which, if used properly, can act as an “early warning indicator”. If you can predict and plan for cash shortages before they happen, you will be in a much stronger position to make arrangements for a short-term loan or a bank overdraft.

A good cash flow forecast will not only help you to identify the amount and origin of cash coming into your business, but it will also help you manage how much cash is being paid out and where it is going.

When preparing your cash flow forecast it is important that you use accurate assumptions and that you do not overestimate incoming cash.

A cash flow forecast means that you can:

• Ensure that you have sufficient cash to cover operating costs, pay staff and suppliers.
• Anticipate shortfalls in cash and plan your operations accordingly or arrange finance.
• Determine your borrowing needs and plan for capital investment.
• Control money owing (receivables) and money owed (payables) and manage stock.
• Plan investment strategies to get the best return on surplus cash.
• Determine feasibility of new projects and businesses.

Your cash flow forecast should be compared regularly with actual results so as to keep a ‘finger on the pulse’ of your business. By identifying when expenditure is out of line or when sales targets are not being met, you will be better informed keep your business going in the right direction.