Cash flow forecasting for small businesses

Wednesday September 21, 2016

You don't need to be a fortune teller to run a strong business, but knowing which way the wind's blowing can go a long way toward making sure you've got a fortune to tell.

If you're experienced life in the RIFT, then you already know the importance of maintaining your cash flow. You're used to keeping the current of liquid money pumping through your business, and you know what could happen if it ever froze up. The key to avoiding that financial iceberg is forecasting. It's easier than it sounds, and it's something you need to be doing on an ongoing basis. If you get it right, it can even be the key to unlocking new sources of finance.

Here's how it works. You might throw a party in your business-brain every time your sales go up. That's great, but it's only part of the overall story. Those extra orders you're raking in mean extra costs to get them fulfilled. If you're left waiting a while for your invoices to be paid, you could easily find yourself entering rough waters  in cash flow terms. The trick to it is less about predicting the future than it is imagining it. You don't have to know for a fact that you've got a cash flow clog in the pipe coming up. All it takes is a plan for what you'll do if it does.
The thing about the future is that it's always moving. It's an unknowable, swirling mass of possibilities, but all it takes to get there safely is some solid forward thinking. Seriously, a good cash flow forecast is better than a time machine. A time machine will only show you one possible future. A cash flow forecast will let you plan for all the futures that could be coming. The better your planning, the better your chances of choosing the right future for your business.

Of course, all that isn't to say that you can't make solid predictions. You can look back at previous years, or sideways at your competition to get an idea of how sturdy your cash flow is. The point of a cash flow forecast is to keep your business fast on its feet. Knowing roughly what to expect is the first step toward tackling what you didn't. When a big order comes in without warning, for example, the leeway you left in your sales predictions means you can adjust to keep the money flowing without overstretching yourself. If your forecast shows a lean time coming, you can start making preparations for weathering it early by trimming back costs or arranging good credit terms.

The other thing to bear in mind is that your forecasts need to keep moving, too. You should test the cash flow waters as often as you can - even daily if possible. It's not just about keeping your business afloat in stormy weather, either. Sound cash flow forecasting is a statement that you're taking the challenges and opportunities of the future seriously. By showing that you're planning ahead, you're letting lenders and investors know that you're a safe pair of hands to put their money in. You're making it easier for them to say yes to you, and could find yourself getting better terms as a result. Your forecast will even tell you when the time's right to start looking for that extra finance in the first place.

The secret to good cash flow forecasting is setting it right at the heart of your business. It'll only do you any good if everyone's contributing to the predictions, and taking serious note of them. Forecasts can be wrecked by employees who didn't share vital information because they thought it was "someone else's problem". When the future comes, check it against your forecasts and see how close you were. Use that information in your next set of predictions, and you'll quickly find them getting better and more meaningful.

Lastly, be ready to act when a forecast shows up a weakness in your business or an upcoming opportunity. Don't cling to the best-case scenario, but don't get blinkered by the most pessimistic one either. After all, a forecast's no use if you've dug your heels in too deep to react to it. Scan the horizon, plot your course toward it and keep listening for more Voices from the RIFT...

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