The Value of a Cash Flow Forecast

A cash flow forecast can spell out the difference between good and bad financial management. Do you know how to do cash flow forecasting?

We started Business Buffet with cash from savings (mine). We also had a government production contract that guaranteed receivables for two years. Our credit rating was excellent, and we had qualified for "free" marketing money through a government program.

If cash is King, we felt like royalty!

We started spending, all the while believing we were being thrifty and conservative. We started traveling around Canada and the States to various small business events, presentations and marketing and networking events. Feedback was great. And sales started to come in.

Every sale was exciting - exciting enough for us to want to celebrate (which we did, quite often). We were on a roll!

At first, we paid all bills in cash. Then it became obvious we'd have to use those government marketing dollars and draw on our line of credit - "investment spending", as my partner called it.

Eventually, The Light Dawned...

Now I realize that with a proper, practical Cash Flow Forecast, I might have been able to anticipate our cash:credit needs. Instead, we used our cash until we had to use our credit. (Not the strongest management technique, for sure!)

A Cash Flow Forecast helps predict whether there'll be enough cash through the year to support your business, and how much cash to have on hand at any time.

If you show a deficit at the end of a month, you need to rethink... what terms can I stretch to delay some payments? How else can I increase my output if I DON'T buy this equipment?

You may discover that you'll need financial help to tide you over. With a realistic Cash Flow Forecast, you can impress lenders with your understanding of cash flows and show them that your business is on a sound cash basis.

And knowing how much cash you need at any point will help you negotiate customized loans and terms that fit your forecasted schedules.

The strength of Cash Flow Forecasting is that it shows the actual flow of dollars through your business, the strongest indicator of how you're doing.

But it doesn't immediately recognize credit sales or payables and receivables, so it can be as misleading as the Operating Statement on its own. What's important is to understand how they interact.

To my mind, interest payments are bad, so these new expensive relationships with financial institutions bothered me. But my partner always reminded and reassured me that this is investment spending - that in business, cash is for paying interest - to finance the growth of the business.

Even though every bit of small business planning information suggested otherwise, I wanted to believe, and so I believed, that those growing interest payments were "simply" the cost of doing business. (I'm ashamed to admit that I pulled an ostrich and buried my head in the sand as the spending continued.)

And ultimately we had to rely on family to save us from that increasingly slippery slope.

And that's the challenge. When we were flush with cash, we got lots of credit, and that created delusions of grandeur - lulled us into complacency.

I wish I had understood how to do a cash flow forecast from the every beginning. It would have made a tremendous difference to our financial management...

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