Cash flow forecasting is definitely one of my pet subjects when it comes to giving business management advice to clients. You need to be fully informed on a ‘day to day’ basis as to how much money you actually have in the bank account, along with how much is going to be in there tomorrow, a week from now, next month… ‘Cash Is King’. Without this knowledge how can you confidently make informed decisions as to what you can afford to spend in terms of the necessities (needs) that keep your business trading, and the desires (wants) that will help improve your business going forward.
I was explaining this to someone a few weeks ago. They were saying that they would really like to make a major purchase for their business, and also employing an additional member of staff would be helpful. So my first question was, “How does these expenditures impact upon your cash flow forecasting?” The reply was a silent, blank stare. You can imagine what followed, and during it all I began to describe making big financial decisions within a business as being a bit like a barometer. At one end of the scale, you have lots of money, and you therefore, potentially, have the ability to spend on desirables, whilst at the other end of the scale you have relatively little cash, and therefore little ability to spend on anything. When money is tight you have to be so strict that you are only spending on the absolute essentials required to keep your business breathing, until such time as the bank account begins to grow and your confidence in the financial stability of the business is such that you can proceed to spend on the “wouldn’t it be nice if we could…”
Afterwards I started to think about my own reactions when asked by a staff member if we could afford a major purchase in one of my own business ventures. I would always (well, usually!) instinctively know what the answer was going to be. This would be as a result of me being totally up-to-date with our anticipated cash flow situation, allowing for acquired business and raised invoices. I then thought, that there must be a way of describing this thought process on paper. I am sharing what I came up with here (see table attached).