Cash Flow Forecast – Why It’s So Important & Tips On How to Manage It
1st August 2011 by Lorna Malone
“Cash Flow” are two small words that are so important to the success of any company be they a huge conglomerate or a small one man band. Being a Financial Director I spend a lot of time looking through a wide range of different financial documents including Profit and Loss, Balance Sheets and Income Statements but the Cash Flow Forecast is by far the most important.
Without cash your organisation will not be able to pay its creditors (no matter how small) and it will fail! I encourage everyone on the team here at VirtualStudio.TV to focus a lot of their attention on cash flow forecast and as a result we have become almost obsessive about it. We all know the impact future work has on the business and we can predict with a high level of accuracy where the company will be financially in the future.
Knowing your precise financial position allows you to react to different business situations changes quickly and with great conviction. In these uncertain economic times knowing where you stand financially is crucial. For a relatively new business such as VirtualStudio.TV having this control over the flow of cash in the business is so important and I believe the reason why many new starts up fail within the first few years is because the flow of money is not scrutinised enough.
Having been a Financial Director for over 20 years and worked in banking previously I have come up with some financial top tips that I hope will help you and your business.
Tip 1. Make sure that you never run out of cash – No matter what it takes! This might lead to difficult discussions or confrontations but if you run out of cash, you won’t have a business.
Tip 2. Always know what your cash balance is – This allows you to react with certainty to any situation that arises be it positive or negative.
Tip 3. Don’t just focus on profit - A profitable company will go bust if you don’t keep an eye on the cash! The two things are very different and should be treated as such.
Tip 4. Use your cash flow forecast to plan six months ahead– The cash you have today is important, but knowing you can make payments or employ more staff and keep in business in the future is essential.
Tip 5. Don’t manage your business from the bank balance - The bank balance and the cash balance are two completely different forms of cash. Knowing when both are going to change and by what amount is vital.
Tip 6. Always take into account the payment terms of your customers when working on the cash flow of the business – The difference between getting your invoice paid in 90 days compared to 30 days could be the difference between being able to pay the rent or not. Take note of these terms and remember to build them into your forecasting.
Tip 7. Always keep a keen eye on when your sales invoices should be paid - Chase up immediately if they are not paid on time. Some people might be forgetful while others might be taking liberties. This point ties back to point 1 – make sure you never run out of cash no matter what!
Tip 8. Make friends with your customers’ Bought Ledger department – ring them and ask if they have received your sales invoice and ask for confirmation of the payment date. This dialogue will make it easier if you ever reach a stage you have to talk to someone urgently about invoicing or payments.
I hope you have found these tips useful. If you have any questions please do contact us and I will be happy to answer any of them. Please do add any of your tips and guidance on cash flow in the comments box below, it would be great to see them!
Finally remember CASH IS KING - NO CASH MEANS NO BUSINESS!!!!
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