In this post I’m going to tell you why cash flow forecasting is vital for business success, and show you how simple it is these days.
In the unlikely event I had a gun put to my head and was told to select just one set of numbers that all franchisees should look at I would choose the cash flow forecast.
Ultimately the bank balance is all that matters isn’t it? You may have heard this old favourite – sales is vanity; profit is sanity; cash is reality. Lots of profitable businesses fail. Profit doesn’t pay the bills – cash does.
Given that, you would think that keeping a close eye on the cash position would be a major preoccupation wouldn’t you?
Well, it is, if by “keeping a close eye on” we mean knowing what’s in there now. But what about in 3 weeks’ time? In 2 months? 6 months? 2 years?
Until recently, only the most committed and business-savvy franchisees forecast their cash position to this extent. That’s pretty extraordinary given how crucial the bank account is. Even if you’re confident about your business’s survival, forecasting your cash position has loads of benefits:
Decision making. Before you rush into buying another territory, adding more office space or hiring a new employee, you need to model how that action would impact your cash position. Understanding whether or not plans are feasible in cold hard cash terms is crucial.
Identifying cash deficits. Forecasting your future bank balance helps you see well in advance when you may have a nasty cash shortage. You’d be surprised how many business owners forget about VAT and tax payments for example. If you know when it’s going to happen, you can do something about it.
Sorting out late payers. By creating a cash flow forecast that takes invoices and bills into account, you’ll be able to pinpoint who the naughty boys and girls are and use this information to improve your credit control. You could even go on to model different payment dates on overdue invoices to see the true effect of late payments on your cash flow.
See where the cash goes and control spending. Being able to scrawl a vague idea of cash in and out on the back of an envelope is one thing, but do you know every time you’re in danger of dipping into the red from one late payment? Are your guesses always right?
If cash is king (and it is) why doesn’t every franchisee religiously forecast it? Because it’s an extremely time consuming, complicated, manual task involving spreadsheets? Absolutely right – it was once. But not any more.
We now use cloud-based tools such as Float to pull data directly from cloud-based accounting software like QuickBooks Online and Xero. Forecasts are produced automatically based on real data and it is just so easy. It is a real game-changer for small business and if you’re not using this sort of thing you are really missing a trick.
Imagine the peace of mind and relief from anxiety that comes from knowing that at any given moment you know, with absolute clarity, your likely future cash position. Priceless.
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Chris Martin is a chartered accountant and business advisor and has been helping franchisees create and grow wonderful businesses for over 20 years. He is a published author and has written extensively on franchisee tax issues. He passionately believes that whilst franchising is a deservedly successful business format, franchisees are often let down by their franchisors’ failure to offer support and guidance regarding the financial side of running the business. This leaves franchisees frustrated, overwhelmed and unable to grow their businesses to the extent they should. Chris has developed simple systems, support and guidance to ensure franchisees create businesses that provide them and their families the lives they so richly deserve.