- Evans Accountants
Why cashflow forecasting is so important - for EVERY business...
We've all heard the saying 'cash is king'... and that's because it REALLY is!
It's easy to think that, with good turnover and profits, cash will automatically follow, which may be the case... but there is the big question of 'when?' to consider.
The following example of a new business demonstrates how, even though sales are great and increase month by month (making the business instantly profitable), there is actually negative cash for quite a period of time:
Let’s say the business sells £10,000 of goods/services in month 1, but that the cost of providing them is £7,500. The costs must be paid up front but payment won't be received for 30 days. This means there is a profit of £2,500 (great!) but that the bank balance is £7,500 down (not so great). Sales increase by £2,000 each month but cash doesn't go into the black until month 6...
This example shows a business with fantastic potential but if this situation isn't anticipated, it may not be possible for the new business to survive. Hence the importance of forecasting and preparing in advance.
This goes for existing businesses as well as start-ups. Our advice to every business is to let us help you track and forecast cashflow using a modern accounting system (such as Xero), so you always know how much cash you have (in real-time) and when any shortfalls are likely to occur.
If you would like help with cashflow forecasting, or would be interested in introducing regular strategy meetings, please don't hesitate to get in touch.