A recent survey from the British Chambers of Commerce (BCC) shows that for most companies cashflow has been worsening since the middle of 2007. Reflecting on this news, The Economist describes cashflow as “the most vital measure of long-term business health”. Cash is king, and right now diminishing cashflow is testing the well-being of UK businesses.
Cashflow forecasting should be paramount on every business’s agenda. Not just because trends show worsening cashflow almost universally, but also because credit has become less readily available and more expensive. (A September snap poll by the FSB found that three-quarters of business borrowers had seen an increase in the cost of credit in the past year).
Fundamentally, the earlier you know about upcoming cashflow shortfalls the better. Time makes you less desperate, for one thing; financiers, whether they be investors or creditors, are not as friendly in the face of desperation. Conversely, forward-thinking, planned attempts to finance cashflow shortfalls put you in a stronger position to attract and broker the right deal. Other challenges – such as boosting cashflow by increasing prices or sales volumes – could also take time, and thus must be planned and implemented far in advance of actual shortfalls.
Forecasting a couple of months in advance affords little scope for significant changes to your financial or strategic plans. Six months may do, and twelve might be better. How far forward you go may depend on how accurately you can forecast (but even less than accurate forecasts are better than nothing as long as they are regularly revised). Or it might depend on what you your biggest challenges are; for example, if declining sales mean you must re-think your sales plan and pump more money into marketing, how long will that take? If the answer is 6 months, you should forecast into and far beyond that period, so you can track potential cashflow shortfalls which might arise during and after.
A cashflow forecast can also be used to forecast and test hypothetical scenarios. Try making a list of ’sensitive’ cash income. For example, income from customers that might themselves be influenced by economic downturn, resulting in loss or non-payment of their business. Or indeed, list products and services that you rely on which could become more expensive (fuel, for example). Then make a copy of your cashflow forecast and play with the numbers. Test scenarios, such as 10 per cent reduction in business, or a 30 per cent rise in energy costs or credit interest. Asking such hypothetical questions could allow you to foresee how exposed you are to changes, three, six or twelve months in advance of a shortfall arising. To illustrate: an astute house-builder might have tested the impact on their cashflow of a 15 per cent average drop in house prices, and used this intelligence to put in place contingencies to cover shortfalls, should the worst happen.
Testing hypothetical changes in cashflow could expose weak spots, but with that, it could inform strategic thinking. If your cashflow relies heavily on the stability of one particular variable – such as sales volumes or fuel prices – arguably your strategic planning should look for ways to manage such a vulnerability.
One potential danger of cashflow forecasting is doing so inaccurately or without adequate, regular review. If your long-term cashflow forecast is not reliable or periodically revised, you may believe your cashflow is sufficient when it is not. Shortfalls could then hit with unexpected bangs as long-term forecasts become immediately different realities.
More than ever before, cashflow forecasting is something to be mastered. The process provides a glance into your financial future, providing sufficient time to identify and solve problems before they arise. But without regular attention, a cashflow forecast could become a false security blanket. These two facts mean you must do it well, and do it often.
More info – Cashflow management: the basics (Including a sample cashflow spreadsheet)
More info – Review your financial position