Cash Is King

Cash Flow problems are one of the biggest reasons why businesses in the New Zealand fail. We have all heard of the expression "cash is king" but it really can make the difference on whether a business succeeds or fails. Businesses generally over- focus on profit and turnover rather than their cash needs.

In this article I will briefly look at why cash flow and cash flow forecasting is important for your business.

Before we look at the benefits of cash flow forecasting, let me just explain what I mean by this term. Basically a cash flow forecast is an estimated summary of the future cash inflows and outflows, in physical terms, that are expected to occur over a particular period for a business. It is usually summarised on a monthly basis. If the inflows from sales and other receipts are greater than the outflows (cash paid out) at the end of the month, then the business is said to have net cash inflow.

Firstly, preparing a cash flow forecast will help you to identify times when you need more funding. For instance, it may be that a large item of equipment will need to be replaced in six month’s time but from the forecasted report you see that this cannot be funded through the reserves of the business. This will allow you to approach a lender well before the new equipment needs to be acquired and agree the finance.

In connection with the above point, a forecast is an important element of any business plan you submit to a bank or other lender. It allows them to match the right sort of finance to your projected financial needs. A cash flow forecast is also sometimes required by a lender when you are looking to renew your business bank account overdraft facility.

A cash flow forecast can identify problems as regards expenses and other items that the business has to pay out. Thus, you may be able to cut back on some of these expenses if they are controllable and thus improve you overall net position.

A forecast will also show you and highlight the effects that poor paying customers are having on your cash reserves. When forecast information is looked at in conjunction with the sales figures and debtors figures for the business you will be better placed to decide what to do about any problems that have arisen in this area.

Cash flow forecasts should be compared to the actual accounting figures when they become available at the end of the month. What figures are different? Why are they different? You will need to analyse these differences as it will make your future projections far more accurate. This in turn will allow you to make better decisions as regards your future business activities.

Cash Flow Forecasting is a great business tool that allows you to get a greater understanding as to how your business will potentially perform in the coming months and years. Of course it should be used in combination with other tools like Xero online accounting.


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Keep an eye out for June’s article!


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