Importance of Cash Flow Forecasting for Small Businesses

|by Zoe Farnworth|Taxation and Compliance,Business Advisory

Cash flow is one of the key challenges and stress points for Australian small businesses. Staying on top of cashflow is vital to success and longevity of a business, even when the lifeblood of the Australian economy isn’t dealing with the disruption of a global pandemic.

To alleviate some of the mystery and anxiety around cashflow for a small business, it is important to have in place a fluid and accurate cash flow forecast.

A cash flow forecast estimates the cash inflows and outflows of a business over a future period. Cash flow forecasting is an important tool for small businesses for these key reasons:

  • Identify when a business may run short on cash – think of it as an early warning system to predict and take appropriate preventative steps.
  • Be in the know – knowledge is power and understanding the impact cash has on a business is key to growing in confidence about future growth and direction.
  • Assist in the decision-making process – understanding cash position and the impact of levels in the business will help business owners make more informed decisions around investment, growth and funding commitments.
  • Understand the impact of growth on cash flow – in some instances, growth in sales doesn’t align with growth in the bank balances as the demand for supplies and resources match or outweigh additional sales. A cashflow forecast can assist in planning for growth and identify potential short-term funding requirements.
  • Identify potential customer payment problems – delays in payments can cause major financial strain on a business, regularly reviewing an up to date cash flow forecast can help identify negative trends in customer payments and allow business owners to react in a timely manner.
  • Banks are likely to require cash flow forecast for finance applications. The exercise of cash flow forecasting also demonstrates a business owner’s commitment to invest time in good governance.

In today’s digital space, there are many tools that can assist in accessing real time information to feed into a cash flow forecast. Harnessing the power of technology can mean the edge over competitors as the ability to respond to changes in business environment is supported by knowledge and clarity around expected cash flow position.

Cordner Advisory can support you in making more informed business plans and decisions with real time cash flow forecasting tools and advisory services.

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