Updated: 18th February 2020
Analysing Current Cash Flow to Ensure Future Financial Stability
Cash flow forecasting helps you maintain a positive cash position, and assists in growing your business sustainably. It’s vital to know how much cash you have to work with at any given time as an unexpected shortfall can result in failing to pay the bills as they become due.
This is one of the signs of insolvency so forecasting also protects your business from the threat of closure, but how do you use it to inform business decisions and plan for the future with confidence?
Using cash flow forecasting in your business
Your overall cash position as a business can be affected or disrupted by many factors, including:
- Late payers
- Unexpected bills
- Increases in your own supplier payments
- Loss of a customer
- Overtrading
Having to pay suppliers before you’ve received payment from your customers is a common scenario, and there’s often a significant period of time between cash leaving a business and the money from sales being received.
Poor cash flow can lead to difficulties with regard to fulfilling orders – it can slow down growth and even impact on customer service and business reputation. Strategically tracking cash movements helps businesses overcome this frustrating position.
Three-way forecasting
Three-way forecasting integrates cash flow with profit and the balance sheet. It provides a more in-depth view of the company’s performance and can reveal issues that may otherwise go unnoticed.
The profit and loss account shows the company’s revenues and day-to-day expenditures, and when used alongside a cash flow forecast shows that the business can be profitable but still have poor cash flow. So the business could be highly profitable, but unable to pay the bills as they fall due.
The other element involved in three-way forecasting is the company’s balance sheet. This shows you the assets held by the business, its liabilities, and equity, and reflects movements in cash that aren’t shown on the profit and loss account.
