While starting a business comes with the opportunity to be one’s own boss and being a part of something that one has built from scratch, it also comes with a terrifying number of challenges. Foremost being the trouble of identifying the uniqueness of their business and marketing it to their profit. However, a very challenging aspect, that most entrepreneurs fail to recognise in the early stages of establishing their business, is the management of cash flow. As they say, ‘Cash is King’, and a sudden shortage of it might ring alarm bells for a small business, that is yet in its initial stages. Thus for a start up, cash flow forecasting becomes of utmost importance.
Cash flow forecasting is merely an estimate of the flow of cash, in and out of your business, over a period of time. To put it simply, it is an projection of the position of your business in the near future, based on the deliverables and payments. It is a key component of financial management and holds even more importance for start ups. However entrepreneurs must not fear projecting a forecast of cash flow because of their lack of experience in the area, a large number of accounting apps such as PayPie can not only help new business owners manage and track their cash flow, but can also project a cash flow forecast based on the activities of you business.
Let’s now take a look at its importance for small businesses and start ups.
Provides guidance during the initial phase
Cash flow forecasting can be the thing that prevents a start up from going bankrupt during its initial years. Since the initial years of a new business are uneven and tumultuous in terms of cash flow, a forecast helps the business access their requirement in the near or distant future, and can help prevent a cash flow crisis.
Helps the business stay within budget
A forecast of the cash flow gives the company an idea of the amount that they can afford to pay to suppliers, employees, etc., thereby helping them avoid overspending unnecessarily. A forecast also helps them delegate funds better, so as to obtain optimum results out of every investment.
Provides assurance to investors and shareholders
A forecast of the cash flow also puts the shareholders and investors at ease. Even though a forecast is not an exact deduction, it is an accurate enough assumption to assure the investors and shareholders that the business that they have invested in, would not find itself in trouble any time soon.
Helps in assessing and adjusting to the market
The market is dynamic and is prone to changes in the costs of raw materials, labour, services and products, seasonal fluctuations in demand and supply etc. A forecast, in such a case, helps a company or business, prepare itself for a hike in the prices of the commodities and manage their cash accordingly.
Helps in identifying trends in your business
Companies prepare cash flow forecasts, from anywhere between 3-4 months, to up to 12 months, and in most of the cases, the actual account differs slightly from the forecast. This difference between the forecast and the real account can help a business indentify negative or positive trends in their workings. For example, it can help identify a customer that never makes the payment on time, or it can help identify an investment that is earning better yields than expected or one that is earning poorer yields than expected.
Thus, forecasting of cash flow is a core component, when it comes to establishing and running a business. It is a tool that can not only help you in the immediate future, but can also help you achieve ultimate success in the ever expanding world of start ups.