I’m a firm believer that every business large or small, well-established or brand-new, needs a cash flow forecast in place yet only around 10% of the businesses I talked to actually have one and use it regularly. The 3 main reasons people give me for not having this in place are:
- They don’t know how to do it
- They don’t see any benefit in having it so they’re not sold on why to do it (I know I’ve got enough cash in the bank to pay for everything, isn’t that enough?)
- They don’t want to face up to the truth of their figures. They just don’t want to do it!
So let’s get the most obvious question out of the way first. What is a cash flow forecast? Put simply it’s a document or system which shows you all the cash due to come into your business along with all the cash due to go out and confirms whether you’re building up the bank balance or chipping away at it.
So why do you need it? Isn’t it enough to check the bank balance of regularly and know everything is okay, after all anything more complicated than that is your accountant’s job anyway isn’t it? Here’s why this is something you need to stop sweeping under the carpet. Firstly this is your business and your responsibility. You have to take ownership of this if you are truly committed to making a success of your business. This is a trait all the most successful entrepreneurs share. They take responsibility for everything happening in their business. Which doesn’t mean they have to DO everything. Getting a bookkeeper, accountant, virtual PA or even a friend to do the number-crunching is perfectly acceptable. Your job is to make sure it gets done by someone and to pay attention to what the figures tell you.
The second crucial reason is the knowledge that the forecast gives you. That knowledge allows you to make balanced and informed decisions about the future of your business instead of relying on gut instinct and hoping for the best.
And my third reason is for those too frightened to look at the numbers because they know they won’t be pretty. When your business is struggling that knowledge alone creates a huge amount of stress. There’s a good chance your mind will be constantly racing and you never feel relaxed, so surely facing up to the actual figures in black and white would only make this worse wouldn’t it? Nope, I promise you it won’t. And here’s why:
- Clarity: you will know exactly how much your business is short by and you can see exactly what impact that will have and when
- Control: once you’ve identified how much you are short by you can work out exactly how many more customers you need to find or how many more products you have to sell to fill the gap
- A plan: that information allows you to focus on exactly what you need to do to find the added sales
When you put all of those things together it actually creates far more peace of mind. The figures may not make great reading but at least you know where you’re up to. Compare that with the uncertainty and constantly worry of not knowing and feeling powerless and out of control.
Watch out for my next post to give you more nitty gritty about how to create your own cashflow forecast.