Why Your Cashflow Forecast is Usually Wrong19th August 2020
Back in 1876, an internal memo for Western Union, then the leading telegram company, confidently declared: “This telephone has too many shortcomings to be seriously considered as a means of communication.”
They believed it was a technology without future.
Meanwhile, just four years later, Henry Morton, president of the Stevens Institute of Technology, had this to say about Thomas Edison’s lightbulb: “Everyone acquainted with the subject will recognise it as a conspicuous failure.”
And in 1946, a movie producer for 20th Century Fox, Darryl Zanuck, went on record saying: “Television won’t last, because people will soon get tired of staring at a plywood box every night.”
We all know how that turned out….!
Forecasts are notoriously difficult to get right.
And that includes cashflow forecasts.
Now, you might be raising a puzzled eyebrow at this…
After all, in my email last week I explained why you need a cashflow forecast for your business – and why, in the current economic climate, it’s practically do-or-die.
It’s just too difficult to make sensible financial decisions for your business, without understanding how much money you’re likely to have in the bank next week, next month or next quarter.
And it’s too easy to run into financial trouble, as well – waking up one morning to discover that despite a glut of new orders, too many clients haven’t paid you and now you can’t pay your staff…
But today I want to share a little secret with you.
All cashflow forecasts are wrong…
…Or at least, they get out-of-date very quickly.
This isn’t because the people preparing them don’t know what they’re doing…
It’s just that reality changes fast.
Say, for example, that your cashflow forecast predicted that you’d collect £100,000 from your clients next month – but two of them fell into financial difficulty, and delayed payment.
Suddenly your bank account is missing £10,000 that you’d been counting on…
Your cashflow forecast is wrong.
Or let’s say your February forecast said your company was due to have £34,500 in the bank on March 27….
…And then a pandemic hit, your team shifted to remote working and suddenly you had to buy 10 people laptops and other equipment allowing them to work from home.
Suddenly, at the end of March, you only have £24,500 in the bank… (Which suddenly makes it tighter to meet payroll in April… Hmmm….).
The February forecast is off again.
So does this mean that cashflow forecasts are a waste of time?
Not at all. It’s just that they’re not one-and-done.
You can’t just create a cashflow forecast in February and then not touch it for another 3 months… or longer… (like most businesses do).
Your cashflow forecast is a moving feast – it needs to be updated frequently.
So the moment you realise that those clients weren’t going to pay you on time, you need to update your forecast – allowing you to make any adjustments necessary to your payments that month.
And the second you realise that you’ll have to pay for your staff’s laptops, that needs to be reflected in your forecast too – so you can start planning for payroll.
We monitor and update our clients’ cashflow forecasts every single day.
Because they include the very latest data, they are still an indispensable tool for the owners of the businesses we work with.
They use their cashflow forecasts to plan ahead for their business…
See financial problems the very second they arise (and do something about them!)…
And (with our help and support) to make far better decisions for their business.
We can do the same for you.
To find out more about how we can help you, get in touch with me today.
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