Subjects Shop Courses Live Jobs board. View shopping cart. View mytutor2u. Account Shopping cart Logout. Explore Business Business Search. Explore Blog Reference library Collections Shop. Jim Riley 1st April Share: Facebook Twitter Email Print page. Business Jim Riley. Although cash is generally not the root cause of business liquidation, good cash flow forecasting can help business owners to navigate downturns and avoid liquidation.
Managing your cash flow tightly can help you get through a tough time and be ready to take advantage of new opportunities when conditions improve. For example; if your business loses a major contract unexpectedly a good cash flow forecast will immediately give you an estimate of the amount of time you have to reduce your cost base to match your new lower revenue before you experience a cash shortfall.
What creates the cash flow issue is the lag between that decline in revenue and a business downsizing. Businesses are great at adding new costs as they grow, employing new people. The number one habit for good cash flow management is to be constantly reviewing, updating and challenging your assumptions. You also need to understand the net working capital position and profitability of your business. Understanding net working capital is critical to cash flow forecasting. In some businesses, as they grow, cash increases.
In others, as they grow, cash decreases. Three core reasons for cash flow issues are; profitability, negative networking capital and high leverage.
Profitability is the most straightforward of the three issues. Simplistically, if you spend more than you earn then eventually, you will run out of cash. Negative working capital and high leverage are less understood causes of cash flow issues and can both occur even though a business is profitable. As mentioned previously, the negative net working capital issue refers to a contraction of cash caused by growth as a result of having short supplier payment terms and long customer payment terms.
Leverage refers to the proportion of debt vs. By closely monitoring and understanding prior trends, such as how many days it takes your customers to pay, you will have foresight into the future. Crystal balls and uncomfortable surprises are replaced with clarity and peace of mind. Cash flow forecasts build confidence for owners, investors, and banks because they provide visibility and control.
And with a host of goals for your business, as you enter the new year, one of those goals should be to ensure your investors have confidence in their decision to invest in your business. Creating confidence is more than just painting a rose-colored picture of your business.
Having a good cash-flow forecast gives you the insight and time to adjust course before running aground or missing an opportunity. Plan and prepare and project as we might, in business as in life, not everything is within our control.
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