THIS is more important than a cashflow forecast

26th August 2020

You’re just settling into your desk for the morning, when there’s a flash of light and a puff of smoke…

A man appears by your desk.

He comes from the future – from exactly 3 months’ time – and he comes bearing bad news.

Several big orders that are currently in the pipeline are going to come through in October…

And so, to deal with all the additional demand, you’re going to have to invest in several new staff members and some new equipment.

On November 25th, your business is going to experience a cash crunch…

Even though it will feel like you’re growing faster than ever, you’ll actually be dangerously close to running out of money!

What would you do?

After rubbing your eyes in disbelief, confirming this is not a hoax (and quizzing him on the Coronavirus situation over the autumn)…

…You’d probably get right back to work, to figure out how to save your business.

Maybe you’d find new ways to bring in extra cash, to finance all that growth…

…Or perhaps you’d look at other ways to cut your expenses or manage the new work.

Either way, you’ve been given three months’ notice of trouble – you’re going to take advantage!

Most businesses would love to receive advance notice of serious financial problems in their business…

…And the good news, you can get one, even if you don’t have access to a mysterious time-traveller.

Your “advance trouble notice” is called your cashflow forecast.

It’s a prediction of what the future holds for your finances.

And while – as I explained last week – it isn’t necessarily 100% accurate, when it’s based on the most up-to-date data you have and frequently updated, it’s the closest you’re going to get to a prophecy.

But the reason it’s so critical to businesses like yours isn’t that it’s nice to know what’s going to happen…

It’s because having some foresight of your cashflow allows you to take action…

So you can fix any issues you can see coming up…

…and improve your financial outlook.

In short, the real magic isn’t in the cashflow forecast…

…But in cashflow management.

Now, many businesses never make that jump.

They produce a forecast, which then sits in a draw or on a computer somewhere, lonely and ignored…

It never becomes a working document which they use day in, day out, to improve their financial situation.

It does when you work with us - here’s one example.

One of our clients is a heritage steam railway company, which runs through a national park.

When Coronavirus hit and they were no longer able to operate, we worked hard to produce a forecast of what their financial future might look like.

Since there were so many unknowns, we had to develop a few different scenarios, depending on when they might be able to start generating income again, what uptake might be like – and what they might have to spend.

This cashflow forecast exercise allowed them to see just how much money they might be short of, over the next couple of years.

And with real figures to hand (not just “we’re going to be short of a lot of money”), we could set to work with them on plugging the gap.
So, for example, they launched an appeal to the charity’s supporters.

We met with the bank to explore their appetite to help, and find out what the conditions may be. (This meeting would certainly not have gone very well had we not had real numbers to show them!)

And we together looked at other creative ways to bring in more capital.

As time goes by and as conditions change, we’re able to update the forecasts, so at all times we have a very precise handle on how much money we still need to find. We’re unlikely to be taken by surprise!

Other businesses, of course, have other options…

If you see that you may face a financial shortage, you might think of getting rid of stock, collecting money that customers still owe you, negotiating with your biggest suppliers to get better terms, invoicing more quickly and more…

And the further in advance you can foresee any problems, the more time you’ll have to come up with the right solutions.

Without a cashflow forecast, you might not realise there is an issue until very late in the game…

…And then you’ll have to act under pressure, work with less options…

…And if things are really bad, you just might not have time to fix them before you get into serious trouble.
That’s why closely monitoring and managing cashflow is the mark of a mature, well-run business.
When problems are signposted ahead, you can fix them as you go along, instead of constantly fighting last-minute fires.

It makes for a smoother business…

And a much easier life for you, as CEO or owner!

That’s exactly what we deliver for our clients, when we manage their finances.

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