5 Advantages of a Cash Flow Forecast for your Company
Companies have great advantages with a cash flow forecast, because it helps to anticipate cash shortages and can even prevent insolvency. What other advantages it has and why it is so important for companies, we show you here.
Importance & benefits of a cash flow forecast
The advantages of a cash flow forecast are numerous. The forecast not only provides an overview of the cash flow, but also helps with corporate planning. Especially in economically difficult or uncertain times, it is an important tool.
It is used to anticipate cash flow bottlenecks so that they can be counteracted at an early stage. If you look at why a company had to file for insolvency in retrospect, you often find that cash flow problems were the reason - and often these could even have been avoided with precise cash flow planning.
Why is a cash flow forecast important to startup businesses?
A cash flow forecast is important for all companies, regardless of whether it is a start-up or a company that is already firmly established in the market. But for start-ups, the cash flow forecast has another, special significance: it must convince investors and other lenders.
The cash flow forecast should always be attached to the business plan. The forecast clearly shows what income and expenses the start-up expects in the coming months. If bottlenecks are imminent, it can also be used to determine how much money investors or lenders will have to provide.
Cash flow forecast: Advantages and disadvantages
Advantages of cash flow projection
Anticipate bottlenecks
The biggest advantage of a cash flow forecast is that it can be used to anticipate cash flow shortages. It can therefore help prevent insolvency because, if detected early, managers can take measures to mitigate the effects of the shortage.
For example, a loan can be applied for in time, investments postponed or other assets liquidated to maintain cash flow.
Plan investments better
If you can see in the cash flow forecast that you can expect high surpluses in the coming months, it is easier to plan when to invest. In this way, you can explore in advance how best to invest the surpluses in the company: do you build up reserves, do you invest in the capital market, or do you expand production capacity? All these questions can be answered with the cash flow forecast.
Play through scenarios
With the help of a cash flow forecast, various scenarios can be run through. For example, you can look at how a supply bottleneck will affect future cash flow, or what will happen if customer demand drops rapidly. How long will the cash reserves last then?
In this way, those responsible can explore their room for manoeuvre and come up with a plan B as to what they will do if one of the scenarios occurs.
Better cost control
By looking at monthly expenses in detail on the cash flow forecast, it is easier to see what the company is spending money on. This can prompt those responsible to put individual cost factors to the test. The forecast also enables efficient cost control and helps companies to work at optimal costs in the long run.
Better receivables management
The cash flow forecast can also help with receivables management. For example, if you see that you often have cash flow problems because customers do not pay their invoices on time or because you give them too long a period to pay, you can optimise this too.
Risks of a cash flow forecast
No 100% security
A cash flow forecast is ultimately only an estimate of the future. It is not guaranteed that the revenues and expenses will actually occur as predicted. Depending on how much time is spent on market and customer analysis, the forecast may be closer or less close to reality.
Some things can't be predicted either. We saw this during the Corona crisis, which caught companies completely unprepared. That's why it's good to take precautions with worst-case scenarios so that you know roughly what to expect in the worst case.
Planning difficult in the long term
A cash flow forecast prepared at the beginning of the year for the entire business year will rarely be correct until the end of the year. Relying only on this one-time planning could therefore lead to wrong decisions. Therefore, in addition to long-term cash flow planning, it is better to do short-term planning, e.g. on a monthly or even weekly basis.
Those responsible thus gain more control over the company's cash flow, and then see during the course of the year through a target/actual comparison whether the planned values for the long-term forecast correspond to the actual values.
Summary: Benefits of a cash flow forecast outweigh the risks
The cash flow forecast is indispensable for a company, which is why time and care should be invested in its preparation. The more precise the approach, the greater the advantages of the forecast. If you analyse the market situation in detail and map it in the forecast, you can often identify bottlenecks before they arise.
All companies - regardless of whether they are a start-up or a growing company - benefit from a cash flow forecast. When it comes to applying for a loan or convincing investors, a detailed cash flow forecast shows that those responsible know exactly about their company and have taken a very close look at the influences on the company's success.
