Cash Flow Forecasting

Anyone in business will tell you the importance of cash, don't assume just because your business is profitable you don't need to monitor your cash position, any expanding business can easily fall into the trap of "overtrading" (this is when a business has increased cash outflows for materials and wages but has insufficient cash to cover the outlay until the customer pays for the goods). You must devote sufficient time to know what your forecast cash position is, if your cash position is extremely tight then you may need to give it even more attention, by forecasting your expected cash position it may highlight areas of concern, this could enable you to start corrective action to avoid the situation, should you require additional funds then it is better to approach the bank manager now about a potential problem three months away rather than waiting till it has happened, if you flag it up early the bank manager will be more impressed with your management skills than simply not being aware of the problem. Cash forecasts should be done to support annual budgets, the impact of additional premises, staff, machinery needed to deliver any increased activity should be seen on the cash balance and any shortfall needs to be addressed.
Whilst the annual cash flow forecast is a very useful tool, it only provides opening and closing balances each month and a lot can happen in those four week periods. To provide the required "visibility" I usually do the first two months in week periods so that it gives more detail and provides a first class tool to manage cash movements, as each week passes I roll the eight week window one week further into the year, you still keep sight of the annual position but it gives you added focus on the next eight weeks which is particularly important if cash is tight.

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