Why Cash Flow Planning Matters to Your Business
Between 2019 and 2020, over 320,000 businesses in the UK shut down. The underlying reasons why businesses fail vary, but often include a lack of capital or access to capital, poor leadership, and failure to market themselves properly.
If you are a business owner, having a clear view of the money that is coming in and out of your organisation is critical for ongoing success, providing invaluable insights into the financial health of your business.
Whilst most business owners have a general idea of their overheads, turnover, and profit, few are equipped to spot trends in their cash flow that could indicate surpluses or shortages of cash.
With the pandemic reminding us that circumstances can change quickly, accurate and reliable cash flow planning is a key tool for businesses to ensure that they can continue to remain profitable.
In our latest blog post, we explain what cash flow planning is, why it’s so important and how you can empower your business with cash flow planning.
What is Cash Flow Planning?
Cash flow planning is a way of measuring the money that will be coming in and out of a business over a specific period of time. This includes overheads such as building costs, staff wages, licences, loan repayments, tax, and any other expenditures the business may have.
Combining this with past, present, and expected future income gives a clear picture of the business’s financial health.
Cash flow planning is often used to aid future decision making and to highlight any upcoming gaps in cash flow that may need to be acted upon.
The Importance of Cash Flow Planning
For many businesses, receipts lagging behind sales, delays in payment from suppliers and long payment periods for customers can mean that despite making healthy profits on paper, the business has little cash on hand.
Unfortunately, this can lead to situations where cash runs dry and the business does not have sufficient cash on hand to make payments to suppliers and staff. Without raising cash quickly, this could lead to the closure of the business.
With proper cash flow planning, these negative forecasts can be identified and countered by cutting costs, increasing prices, or sourcing additional funding if required, something which is easier to achieve if you have more time available.
As well as helping to identify potential gaps in cash flow, planning can also support financial decision making when it comes to knowing if you can afford to invest in the business further.
Whether it’s purchasing new assets, hiring new staff, or investing in a larger premises, accurate cash flow planning helps you understand what capital you have to spend and the impact this will have on future financials.
The Benefits of Cash Flow Planning
The key benefit of cash flow planning is being able to make better and more informed financial decisions. Other benefits include:
- Keep track of clients that are missing payments or paying late.
- Enables hypothetical forecasting of different financial scenarios, such as a large client leaving or employing a new member of staff.
- Allows businesses to make use of any extra cash available.
- Track business income and expenditure more accurately, meaning inefficiencies can be pinpointed and dealt with.
- Lenders and investors will expect to see a cash flow forecast to support any application to borrow money or attract investment.
- Can be used to support an exit strategy to help the director time their exit from the business appropriately.
Recommended Frequencies of Cash Flow Planning
The size of your business and the amount of cash you have coming in and going out will influence the recommended frequency for cash flow planning, but in most cases, a 12 month forecast is recommended.
At Equifino, we generally start with a 12 month forecast and expect the first 6 months of this to have a high level of accuracy. Should there be a notable variance in the initial 6 month period, this would be investigated to find the cause.
From here, the forecast should be monitored to ensure it remains accurate, adding in any new expected incomings or outgoings. We recommend this happens monthly, but in some cases, a longer period is appropriate depending on the amount of ongoing change in your business’s cash flow.
Should a negative period be forecasted, we can help you understand what impact this will have on the business and provide information on the options that are available if funding needs to be raised elsewhere.
To get maximum value from cash flow planning, we also recommend a higher level view that looks at the next 5 years, this can support with longer term planning and feed into your overall business plan.
Do Small Businesses Need Cash Flow Planning?
For small business owners, cash flow planning is probably far down on the list of priorities, but unless significant funding is available, proper planning could be the difference between ongoing success or failure.
With cash often being tighter in small businesses, failure to recognise a cash flow issue before it arises can result in a negative balance. Without other cash available, small business owners may be forced to close or take on debt to fill the gap.
Are There Any Drawbacks of a Cash Flow Forecast?
Cash flow planning is an excellent way of using data and estimates to build up a picture of a business’s present and expected future financial health.
Unfortunately, not all events can be forecasted. For example, a change in legislation that impacts the profitability of a business or a large client leaving. This can give business owners a false sense of security.
Whilst cash flow planning can’t predict these events happening, having a proper forecast can help assess the financial impact and hypothetical forecasting can be carried out to prepare for these events before they happen.
Professional Cash Flow Planning Service
If your business is not currently using financial forecasting, we hope that this post has helped explain the many benefits it can have to organisations of any size.
At Equifino, we empower businesses to make better financial decisions with reliable and accurate cash flow forecasting. Our tailored service means that we are flexible to your needs and can support with financial solutions should a negative period be forecasted.
To find out more about cash flow planning or any of our range of accountancy services, give one of our team a call today on 0117 203 4010 or fill out a contact form and we will get back to you.
