Why and how SMEs need to know how to forecast cash flow

02/06/2018 09:29


In business, the present can often seem like the most important thing. In any organisation, there is a huge amount to do day-to-day and if things are going well, then it can seem like everything is on the right course.

Considering the future, however, can fall into the long grass and go forgotten. This is a mistake many smaller and medium-sized enterprises make. And then, when cash flow issues arise, they become a crisis.

In this article, we’ll look at why and how it’s of the utmost importance for businesses to have a clear picture of their cash flow forecast.



The Why


It is important for SMEs to understand and know their cash flow forecast for an array of reasons. One of the most important is because smaller enterprises are most vulnerable to shortages of funds, precisely because of their size.

The pre-trading period for smaller and medium-sized businesses can be a minefield. This time sees a business taking on costs without initially having any revenue incoming. This can also include marketing costs, which can seem like a sunken cost at the time. Until sales start turning into revenue, this is a risky period. Smaller businesses in their early stages also lack retained profits and suppliers regularly demand early payment for goods.

This is the time to develop good cash flow forecasting habits. It establishes a model going forward, always putting the future at the forefront of plans.



The How


With some foresight and reflection, it’s not hard for a business to see where it will be in a month, two months or even a year down the road.

Simply having a rolling, forward-looking plan is a big step in the right direction. Profit and cash flow forecasts, if accurate and realistic, make it far easier to plan new strategic moves and investments. They also mitigate unexpected shortfalls and the attendant stress.

Once a forecast model is in place, it becomes much easier to identify problem areas in the business. Moving quickly to identify the causes of poor cash flow can save a business before a crisis develops. This might take the form of tardy incoming payments or the cause might run deeper. Either way, you’ll have the tools and insight to address the issues identified.

With all this in mind, there are simple steps to take in order to gain an accurate forecast and get a clear picture of where finances lie now and where they will be in the future. Make a list of all payments outgoing over a specified period – this could be a few months or a year. With these costs in hand, create a realistic, projected forecast of all the sales incoming over the same period. By taking away the outgoing figures from the incoming, you’ll have a good idea of cash flow and what should be available at any one time.

This is just a starting point for cash flow forecasting. Unexpected shortfalls and windfalls can, and will, occur. But these simple steps are all that is needed to build good practice from the ground up.


If your business is looking for investment or other financial services, GIC Capital provides sound, quality advice. We work to ensure your business is a success, and work with you to ensure the future is secure.

We aim to deliver much needed capital to start-ups and SMEs

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