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Q&A - Why is the cash flow forecast so important?

Jim Riley

1st April 2009

If a business runs out of cash and is not able to obtain new finance, it will become insolvent. It is no excuse for management to claim that they didn’t see a cash flow crisis coming.

So in business, “cash is king”.  Cash flow is the life-blood of all businesses – particularly start-ups and small enterprises.  As a result, it is essential that management forecast (predict) what is going to happen to cash flow to make sure the business has enough to survive.

Here are the key reasons why a cash flow forecast is so important:

Identify potential shortfalls in cash balances in advance – think of the cash flow forecast as an “early warning system”.  This is, by far, the most important reason for a cash flow forecast.

Make sure that the business can afford to pay suppliers and employees.  Suppliers who don’t get paid will soon stop supplying the business; it is even worse if employees are not paid on time.

Spot problems with customer payments – preparing the forecast encourages the business to look at how quickly customers are paying their debts.  Note – this is not really a problem for businesses (like retailers) that take most of their sales in cash/credit cards at the point of sale.

As an important discipline of financial planning – the cash flow forecast is an important management process, similar to preparing business budgets.

External stakeholders such as banks may require a regular forecast.  Certainly if the business has a bank loan, the bank will want to look at cash flow forecasts at regular intervals.

Jim Riley

Jim co-founded tutor2u alongside his twin brother Geoff! Jim is a well-known Business writer and presenter as well as being one of the UK's leading educational technology entrepreneurs.

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