By Colin Hewitt, CEO and Co-Founder of Float

Having the cash to run your business is often the crucial difference between success and insolvency. Yet many early-stage companies ignore planning their cash flow forecast because they view it as either an overwhelming task or an optional distraction. So why do it?

1. Spot and avoid cash flow shortages

You need to place your company in a position to respond quickly and effectively to avoid crises. Maybe you’ve got an unexpected tax bill headed your way…maybe you lost a big contract…or maybe you’re coming to the end of your runway.

Forecasting your cash flow will help you understand whether you can weather a storm, or need short term funding to plug a gap, or make cut backs.

2. Become an attractive investment opportunity

Want your business to look its best to appeal to potential investors? Forecasting your cash will signal to potential suitors that you are a serious, financially literate business owner who could be a sound investment.

3. See when you can afford to invest in your business

As an early-stage company, you’re probably desperate to grow and invest back in the business. But don’t be too hasty. You’ll need to run a cash flow forecast to ascertain exactly how much you can reinvest and when.

4. Maintain good relationships with your suppliers

We’ve all been in a position where we want our suppliers to go the extra mile for us. Maybe we need something delivered yesterday, maybe we’re asking for a value-add that’s slightly outside the original scope. Whatever it is, we’re only going to get favours from our suppliers if we have a good history with them.

Being a good payer is a big part of good supplier relations, which means always having enough cash to meet your obligations.

5. Plan for the future

Are you thinking of expanding into bigger offices, or growing your sales team, but you’re not sure if you can afford it? In any eventuality, or different ‘future’, you need to properly plan where your cash is going to understand whether it’s doable.

Cash flow forecasting shows you what will happen to your business based on how you use your cash in different scenarios.

6. Pay your staff

Maintaining a positive organisational culture requires you to be a responsible and timely payer. Forecasting how much cash you will have in the bank will help ensure you never miss payroll. If it’s just you in the company so far, you’ll need to make sure you can pay yourself too!

7. Prepare yourself for external changes

What if a supplier increases their rates? Or what if the government grant you were counting on is delayed? Any external change may have a direct knock-on effect on your cash flow.

Looking to the future, not to the past will help you understand the repercussions of such a change. What effect will this have on your cash flow next month, or six months down the line? It is this information that will guide you through making crucial operational decisions and mitigating risk.

8. Track spending and stay in budget

Could you jot down your forecast on the back of a napkin from the numbers in your head? Great. How about tracking performance towards that forecast? Will the napkin alert you if you’ve gone over-budget?

Accurately forecasting your cash flow will better prepare you for the future and for serious discussions with your stakeholders. You need to know when you’re over or under budget so you can adapt your forecast moving forwards.

9. Avoid trading while insolvent

If things are tight and you’re becoming insolvent, you will usually have a legal duty to stop trading. A company becomes insolvent when it can no longer pay its bills, or when its liabilities outweigh its assets. If you can see it coming, you can often avoid it. But if you’ve got your head in the sand, you could be in for a very rocky ride.

So how do you go about creating a forecast?

You can either

  1. Ask your accountant for help creating one,
  2. Do it yourself in Excel using a template, or
  3. Use a cash flow forecasting tool like Float.

Getting a clear picture of where your how cash moves in and out of your business both now and in the future is a vital piece of intelligence for any ambitious business.

If you’re an early stage business looking for some advice regarding cash flow forecasting or expanding your team, let’s talk.