Why your cash flow forecasts are so vital in unpredictable times

August 17, 2023

Having a tight handle on cash when your trading environment becomes unpredictable isn’t just common sense, it’s fundamental. Having the information available on a timely basis is equally important, in fact it can be the difference between survival and failure. Knowing what safety margin you have and when the pressure points will occur gives you the chance to make more effective decisions and to take pre-emptive action when necessary. In short, cash flow forecasts are vital.

‘But the cash flow forecasts are always wrong’

Too many entrepreneurs shy away from cash flows because ‘they’re always wrong’, which misses the point. Of course they’ll be inaccurate, they’re only forecasts after all. The trick is learning from the variations and constantly honing the reliability.

Forecast basis

It’s no good producing monthly or worst of all, quarterly cash flows either in a fast-moving business or in a crisis. Weekly can be good, daily is even better. Forecasts also need to be done to the right level of detail; too much minutiae will drown everyone in data, while too high a level means the variations are meaningless and constantly need to be broken down and re-analysed.

Getting staff input

Too many cash flows are ivory tower number crunching, prepared by executives with little involvement in the day to day realities of the business. Cash flow is impacted by client retention, debtor days, supply chain management and other factors, on which your staff can provide invaluable insight. Talking to them helps identify risks and provides insights you can feed into the calculations.

Holding quarterly workshops may be a sound strategy to make employees aware of the situation and get ideas on how the business can save money and increase cash flow. This could have the priceless benefit of giving staff a sense of ownership and involvement in cash generation and savings.


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The importance of sensitivity analysis

Financial modelling is crucial during periods of uncertainty. Testing what will happen in different scenarios helps you understand the impact on cash flow, what risks exist and how they can be mitigated.

Making a formal business case for new investment or funding

Your cash flow forecast may show that extra financing could be needed either to support existing operations or to invest in new initiatives. It’s all too easy for a business to try to expand its way out of trouble without sufficient due diligence. Putting together a formal business proposal for any investment or fund raising adds vital internal discipline to cash management, provides a worthwhile ‘explainer’ for disappointed staff when a project is turned down or deferred and is good preparatory work for launching new plans or seeking new funding.

Use cash flow forecasts to shape decision making and prioritise tasks

In unpredictable times, it is always doubly-important to manage your cash resources effectively, so cash flows must be at the very centre of strategy setting, decision making and, maybe most fundamental of all, how management allocate their scarce time and energy. Wasting that precious time on activities that will never pass cash flow scrutiny is not uncommon, especially during periods of stress. It is dangerous and should be avoided wherever possible.

Too busy to do or update your cash flows?

In tough times, the demands on senior management are invariably ferocious, so that challenging tasks like cash flow forecasting and updating can easily slip down people’s priority lists. There is no shame in bringing in extra resource to make sure that this key task does not fall behind. There may be a valuable extra bonus from having a fresh pair of eyes look at the forecasts and challenge their underlying assumptions.


How we can help

We have extensive experience advising business owners and management teams, and we will always work with you to find the best solution for you and your business.

One of our Partners would be more than happy to have a non-obligatory confidential chat with you. We can be contacted at rescue@opusllp.com or call us on 020 3326 6454 and we will arrange for a call with one of our Partners.

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