Forecasting your cash flow to avoid lumps and bumps
It is a myth universally accepted, that cash flow forecasting is only for businesses in a cash crisis.
However, for businesses that have fluctuating cash flow, forecasting can be an invaluable tool in taking advantage of the highs and tackling the lows.
What fluctuating cash flow can do to your business
There are almost as many causes of fluctuating cash flow as there are business owners kept awake at night by their financial situation.
Construction and property are just some of the industries that may suffer from frequent fluctuations in cash. One thing that these industries have in common is that they tend to be project-based. For businesses that move from project to project, it can be difficult to maintain a smooth, healthy cash flow.
While it is normal to experience this so-called ‘lumpy cash flow’, without proper management or oversight, peaks and troughs could spell disaster for the unwitting business owner.
When cash levels dip, it may mean that there’s no recurring revenue to see you by carrying out important projects or paying suppliers and staff. A lack of funds in quieter months can lead to an inability to carry out business as usual. This can eventually lead to insolvency.
However, by properly monitoring your finances, riding the waves of your business cash flow can become much simpler and far less stressful.
With the confidence that a robust cash flow forecast can grant you, you’ll find it much easier to even out the highs and lows of your fluctuating cash flow.
How cash flow forecasting can help
An accurate cash flow forecast can help you to spot cash gaps before they become a problem. Prior warning of impending cash shortages or surpluses puts the right plans in place at the right time.
As the saying goes, forewarned is forearmed.
For any project-based business intent on growing, being aware and taking advantage of a cash surplus is essential. Because, with frequent fluctuations in your cash flow, a fall into the red could be just around the corner.
Knowing when you’ll have cash in the bank helps you understand when to take on new projects. During times of plenty, you can choose to upsell to existing clients or expand your market presence to ensure that you have the working capital to get you through times of low income.
Additionally, with insight into when you’ll have a cash surplus you can afford to pay suppliers earlier, which can improve relationships and potentially lead to preferential rates.
On the other hand, when you have limited cash, you may need to take on undesirable projects. But knowing when it’s necessary to do so is essential to getting through the lean months. It will also give you breathing space to apply for loans, ask for additional investment, or tighten your budgets to get you through the tougher times.
Forecasting, though not a crystal ball, can help you to see the wood through the trees. And by forecasting your cash, you can avoid tunnel vision by creating ‘what if’ scenarios, and plan for multiple eventualities.
Scenario planning can help alert you to what lies ahead. It also can help you to understand the barriers you’ll need to overcome in moving forward. Scenario planning can bring you confidence in your future plans.
A cash flow forecasting tool such as Float, that links in with your accounting software, can help you to easily and visually forecast your cash. With a built-in scenario planning tool, Float can help you to model out the impact of different business decisions on your cash flow, and help you to navigate the highs and lows of business finance.
Regardless of how you run your business, cash flow forecasting can help you to turn data into decisions. For project-based businesses, extreme highs and lows can often spell disaster.
With diligent monitoring of your forecast, rest assured that you’ll be well prepared to deal with whatever hurdles come your way.