Small businesses are the backbone of the global economy providing employment opportunities and essential products and services. However running a small business is no easy feat especially when it comes to managing cash flow. Cash flow is the amount of money that flows in and out of bank accounts of a business and it’s essential to ensure that a small business is running smoothly. In this article we will discuss the importance of a cash flow forecast for small businesses and how it can help them to survive and thrive.
What is cash flow forecasting?
Cash flow forecasting is the process of estimating the amount of cash that will be coming in and going out of a business over a particular period. An accurate cash flow forecast helps a business to determine whether it has enough cash to meet its financial obligations and to plan for future investments. It is a critical tool for small businesses because it provides them with the information they need to make decisions about their finances. A positive cash flow will have more cash coming in than going out. Too long a period of negative cash flow could cause trouble and you’ll need to do some forward planning.
Why is cash flow forecasting essential for small businesses?
Helps in managing day-to-day operations
Cash flow forecasting is essential for small businesses because it helps them to manage their day-to-day operations. By predicting actual cash flows, inflows and outflows, small business owners can identify potential cash shortages and plan for them. This allows them to take steps to ensure that they have enough cash to pay their bills and keep their business running as well as plan ahead.
Enables business owners to plan for the future
Forecasting also enables small business owners to plan for the future. By looking at future cash flows they can identify potential opportunities for growth and investment. They can also identify potential risks and take steps to mitigate them. This allows them to make decisions about their business and plan for the long term.
Helps to secure financing
Forecasting is also important for small businesses that are looking to secure financing. Lenders and investors want to see that a business has a solid understanding of its cash flows and that it can repay its debts. By providing cash flow forecasts small business owners can demonstrate their financial stability and attract potential lenders and investors.
How to create a cash flow forecast for a small business?
Creating a cash flow forecast and cash forecasting for a small business can seem daunting, but it doesn’t have to be. Here are the steps to follow:
Step 1: Estimate your cash inflows
Start by estimating your cash inflows. This includes all the cash inflows and any money that you expect to receive from customers, loans or other sources.
Step 2: Estimate your cash outflows
Next, estimate your cash outflows. This includes any expenses that you expect to incur such as rent, salaries, utilities or other costs.
Step 3: Calculate
Once you have your cash payments as estimated subtract your outflows from your inflows to calculate your net cash flow. This will give you a sense of whether you will have enough cash to meet your financial obligations.
Step 4: Review and adjust
Review your cash flow forecast regularly and adjust it as needed. This will help you to stay on top of your finances and make informed decisions about your business.
Conclusion
Cash flow forecasting is a critical tool for small businesses. It helps them to manage their day-to-day operations, plan for the future and secure financing. By creating a cash flow forecast small business owners can make informed decisions about their finances and take steps to ensure the long-term success of their business. The number at the end of each period is referred to as the closing cash balance. This will be the opening cash balance for the next period.
FAQs
What is cash flow forecasting?
Cash flow forecasting is the process of estimating the amount of cash that will be coming in and going out of a business over a particular period.
Why is forecasting important for small businesses?
Cash flow forecasts are important for small businesses because it helps them to manage their day-to-day business finances well.
How can forecasting help small businesses to plan for the future?
Forecasting enables small business owners to identify potential opportunities for future growth and investment and plan for them.
How often should a small business review and adjust its forecast?
A small business should review its cash balance and adjust its cash flow forecast regularly -preferably on a monthly basis.
Can a cash forecast help small businesses to secure financing?
Yes, forecasting is important for small businesses looking to secure financing as it demonstrates their financial stability to potential lenders and investors.
