Advantages of using a cashflow forecast
How cashflow forecasts can be used to avoid overtrading and other problems.
An adaptable cashflow forecast can be an invaluable business tool if it is used effectively.
It's helpful to set up a regular review of the forecast, changing the figures in light of your sales, purchases and staff costs. Legislation, interest rates and tax changes will also impact on the forecast.
Having a regular review of your cashflow forecast will enable you to:
- see when problems are likely to occur and sort them out in advance
- identify any potential cash shortfalls and take appropriate action
- ensure you have sufficient cashflow before you take on any major financial commitment
Having an accurate cashflow forecast will enable you to see when problems or cash shortfalls are likely to occur and work to avoid them. It will also enable you to prepare fully for growth by planning when and how much to invest.
Your cashflow forecast can also be vital in helping you to ensure you can achieve steady growth without overtrading. You will know when you have sufficient assets to take on additional business - and, just as importantly, when you need to consolidate. This will enable you to keep staff, customers and suppliers happy. See avoid the problems of overtrading.
You should incorporate warning signals into your cashflow forecast. For example, if predicted cash levels come close to your overdraft limits, you should have a contingency plan - eg by retaining some 'back-up' cash in another business bank account - to bring your cash balance back to an acceptable level. See identify potential cashflow problems.