Does your business have enough cash to breathe?


Cash is the oxygen of any business, particularly for small enterprises and start-ups. It’s easy to get bogged down with profit but there’s a very real danger of entrepreneurs not putting enough emphasis on cash flow.

Having an accurate cash flow forecast readily available can help you foresee potential problems which may arise in the year ahead, and it can help businesses make important decisions about their future.

To put it simply, businesses need cash flow for them to keep themselves solvent. No cash spells disaster. This is why planning and cash flow forecasting is so important!

If your business lacks cash, and it isn’t able to obtain any new finance, it will fail – harsh but true. There is no excuse for businesses not to see a cash flow crisis coming, especially given how easy it can be to create a cash flow forecast.

Here are just a few key reasons why cash flow forecasts are essential:

  • Pinpointing potential shortfalls in cash balances
  • Enables you to see when problems or cash shortfalls are likely to occur so you can plan to avoid them
  • Ensures you have enough cash to pay employees and suppliers

A positive cash flow is essential if you want to generate profit. You need enough cash to pay your employees and suppliers so that you can produce your goods and services and those are the things that give you your profit … see where I’m going with this?

Be disciplined about financial planning

Track when money is coming in and going out.  Financial planning is imperative; you need to be disciplined and regimented with knowing the amount, when it is expected and when you are going to need to pay out. Your business will be super ready to deal with any challenges or issues that come your way if your cash flow forecast is robust.

Does your bank need to see regular cash flow forecasts?

They won’t want to see it regularly, but if you end up needing a loan your bank will request a detailed cash flow forecast before they even consider giving you any money.

Spot the signs of cash flow problems

The most important part of cash flow forecasting to remember is to understand what you’re looking at and address any cash flow issues that you may have. Depending on the magnitude of the cash flow problem you may need to take different measures – ranging from “tightening the belt” to taking out a loan.

If you’re still profitable after having cash flow difficulties; you may just have to tighten up your credit control measures, reduce your costs or perhaps seek advice from the bank. More regular and serious cash flow predicaments will require more drastic action.

The likelihood is, if you face cash flow problems frequently, one day your luck is going to run out – so tackle issues early and take the stress down a notch!

What is the worst case scenario?

A cash flow forecast (or any other kind for that matter!) is only as good as the impact it has on your decision making and your success.

Realistically, the worst case scenario if you cannot grasp good cash flow management is that your business will close its doors. A lack of positive cash flow and sufficient money to finance your business is the most common reason why businesses fail.

You’re more exposed to your business’s debts as a sole trader, those bank loans will probably have to be repaid by you personally. On the other hand, if you are a limited company, your personal liability for the debts will be limited (although many bank startup/ small business loans require a personal guarantee from the director, meaning that debt is yours).

It doesn’t have to be difficult

If you find the idea of planning your cash flow forecast perhaps daunting or difficult, check out these tips and fight your finance demons:

Step 1

Make a list of every one of the payments that you are planning to make over the next year. For instance: Equipment, Bills, Stock, Employee Wages, Rent etc. To make this easier you can break this down into months – this will give you a good level of detail and you should have the ability to see clearly where your business could fall into trouble.

Step 2

Now that you have your costs, you will need to know what money is coming in to the company. Next, create a sales forecast and list all of the money which will be entering the business over the same period. Remember, the most important thing about cash flow forecasting is to be realistic!

Step 3

Subtract your outgoings from your incomings and you’ll see just how much or how little money you should have available at any given time. This will also give you an annual and monthly forecast of the state of your cash flow. It will really help you see which months are likely to generate a higher income (where you can build-up a little bit of a financial safety net) and which months you could be in danger.

Needless to say, your cash flow forecast may be slightly more complicated than this, but this is a great place to start if you are a new business. The important thing is to act quickly. Regular cash deficits can really harm a business.