A cash flow forecast is NOT a magic tonic - a resilient business must budget and build assets

I confess to have written in the past about the importance of a cash flow forecast but for many businesses it genuinely is a complete waste of time. Why? Because many business owners see a positive cash flow as cash available for them to spend or draw out of the business. A cash flow is only one of many tools that a resilient business should have in their tool kit along with budgets and a strategic cash management plan, to build assets and cash to get them through economic downturns and difficult trading conditions.

Let's look at an example of a start-up business

It buys its products from a supplier and initially will not get a credit line so has to pay up front. It puts those products up for sale or uses them in its service. There will be a time delay between paying for the product and eventually selling it. But then as a new business it may need to offer credit to its customers so there is a further delay. In the meantime, more product needs to be purchased. In order to assess the cash flow gap between paying for its products and selling them an understanding of the potential cash required can be established with a cash flow forecast. As the business grows this “gap” is sucking in more and more cash which is either filled by borrowing from your bank or by retaining profit. The more profitable the business the more likely it can finance this gap from its own resources. Eventually an equilibrium is reached when the cash coming in from previous sales is more than enough to pay for the products being purchased today.

An established business ...

So, a business which has been establish for let’s say more than three years is likely to have reached that equilibrium and is probably paying off previous debt and is achieving positive cash flow. The problem is that this positive cash flow is seen as being available for the business owner to spend and that’s what tends to happen. A cash flow forecast at this point merely reinforces the belief that it can afford the business owner’s other needs for cash whether that is more employees, more equipment, bigger premises or more dividends. And generally, as long as the business continues on a steady trajectory, it manages cash flow fine. Obviously, if a recession (or a pandemic) hits the economy then this upsets everything but does a cash flow forecast help if the business has little or no reserves to fall back on? It may help obtain a loan but that is just storing up problems for the future. If that cash flow forecast says you can’t actually repay that loan when the repayments start is that really helpful?

A cash forecast is not enough to ensure business survival

Most business owners are not financial people which I suppose is why accountants love cash flow forecasts but business owners only see what they want to see. Therefore, business owners need something more than a cash forecast to build resilience into their business into the future. They need guidance today about what they should be putting aside in savings for the regular downturns that will happen in the future. As a business owner you have a responsibility towards the future success of your business and the safeguarding of your teams’ jobs in the future too. You can only do that if you strictly control your cash and target to grow your reserves. A cash flow forecast does not do this. Benchmarking with a target percentage of profits going into specific savings accounts is far more useful.

Are you putting aside a proportion of your profits each month to guarantee your long term survival?

The Wood and Disney Strategic Cash Retention Program™ provides these targets in a simple monthly review and helps your business become more resilient in the future. 2020 was an exception year of generosity from our Government but in the real world you need to build up your own reserves to survive. You can find out more on our dedicated web page >> Cash Flow Solutions for the longer term - Building a Cash Reserve

You can talk through how Wood and Disney's Strategic Cash Retention Programme can build resilience into your business by calling us on 01206 233170 or fill in the form below and we'll get back to you and arrange a meeting.