Cashflow forecasting lets businesses know when problems might come up so they can be prepared and take steps to avoid cashflow gaps.

You may have heard that cashflow problems are the number one reason businesses fail, but how bad is this widespread problem? To put things in perspective, more than 80% of business failures are caused by a lack of cash, 20% of small businesses fail within a year, and 50% fail within five years.

But things don’t have to be like that. If a business does a good job of forecasting, it can avoid many cashflow problems. Cashflow forecasting lets businesses know when problems might arise and lets them act ahead to prevent cashflow gaps.

Still, many businesses are already running at full capacity, so they don’t think about cashflow forecasting. When a business owner has a financial setback and finds out they don’t have enough cash to cover it.

Many business owners need to realize that good cashflow forecasting has many more benefits than just helping them plan how their business will run. 

Four Reasons why Cashflow Forecasting is so Important

It Keeps Businesses from Running out of Money

This is the most prominent and important reason why it’s essential to plan for cash flow.

Here’s what might happen: John’s client said the payment would be deposited by today, but there was a mix-up, and the bank said John wouldn’t get the money until next week. John needs to pay his vendors tomorrow, but he only has enough money to do so once he gets paid by his client. The cycle keeps going.

Many businesses fail because of this.

Businesses can avoid this by making a cash flow forecast. They can plan for the best, worst, and everything in between with a forecast. Then, they can use that information to make smart choices about how much money to spend, where to put it, and when to spend it.

If the business thinks that money might not come in, they might decide to put off a big purchase. Or they could talk to the people they owe money to and ask for more time to pay. Or, they could discount customers who pay their bills early. The forecast tells the business what they need to know to take action and keep its cash flow from getting tight.

It Helps people get Loans

Businesses need loans to stay in business. Financing can help a business grow, improve its products and workflows, or cover operational costs in a pinch.

But getting financing is more challenging than it sounds, especially for businesses that don’t have much money or credit history. In this case, lenders look at how much money is coming in and going out of the business.

A strong cash flow forecast shows lenders that a business is creditworthy. Conversely, a business can show that it needs a loan and is at a reasonable credit risk by looking at its cash flow forecast. Or, if your cash flow projections show otherwise, it might be a good idea to look at your business and figure out how to improve your cash flow before you ask a lender for a loan.

It Helps Companies Make Better Choices

Cashflow forecasting shows a business what the future might hold. It shows them when money is coming in and going out, so they can better plan for the future and make strategic decisions that work with their budgets.

Let’s say a business is thinking about hiring more people or buying new tools. A business could look at how much money it has now and decide that it could pay for the extra cost. But what if a big client left the business in a week? Or what if competition caused sales to drop all of a sudden?

You can’t get this information from your account balance, which is why businesses need cash flow forecasting. Businesses can make smart decisions about when and how to invest in their growth if they know how much cash they will have in the future.

It Helps Businesses set Goals that They can Measure

Cash flow forecasts can help businesses set goals that can be measured to improve cash flow and figure out how to get better business results.

If a best-case scenario forecast says that a new piece of equipment could improve your business by 50% and lead to a 50% increase in sales, you now have a benchmark number.

Or, if you want to cut costs by 20% by getting rid of parts of your business, cash flow forecasts can help you see how getting rid of a project will affect your business and income and if the cost savings are in line with your decision. You can now set business goals based on data, know what to expect, and measure how well you did.

These are two very different situations, but no matter what your business is going through, cash flow forecasting can help you set goals that you can measure.

Cashflow Forecasting is a lot Easier than you Think

Here’s the thing about cash flow forecasting: It’s been around for a while, but business owners used to give their accountants a hard, labor-intensive, and time-consuming job. The good news is that new technology makes it easier than ever to plan for cash flow. For example, businesses that use cloud accounting platforms can now directly connect new tools to them. This makes cash flow forecasting faster, more accurate, and sometimes even free. So start looking for a solution that works with your accounting platform right now and see what it can do for your business.