Looking to the future with cash flow forecasting
By Johann S|
March 16, 2023
Chances are when you woke up this morning, you consulted your phone for a few insightful metrics on the weather, the stock market, and the load shedding schedule (boo). Using past patterns to give shape to the future is part and parcel of preparing for every single day – deciding which coat to put on, which bonds to buy, and which coffee shop to host your 1 PM Zoom meeting in when the power goes out at the office.
The same principles can (and should) be applied to cash flow patterns. Cash flow continues to represent the hinge upon which the success of so many South African SMEs swing. An all-too-familiar worry for SME owners is the anxiety around not having enough money to cover business expenses. While it is impossible to predict with 100% certainty how the future is going to play out, there are some measures that you can implement to best prepare for whatever lies in store.
Give me the nitty gritty – what is cash flow forecasting?
Cash flow forecasting is a type of risk management which revisits and evaluates past patterns of income and expenses to map out potential tight spots in the near future. Cash flow forecasting can also be described as the process of estimating how much cash is flowing in and out of the business over a specific period. Cash flow forecasts normally work on an annual basis, but you can use them to navigate periods as short as a month or a week.
Where does a cash flow statement fit into all of this?
Before we even answer this question, here’s another one that you might have:
What is a cash flow statement?
A cash flow statement is an obligatory financial statement, just like the balance sheet and the profit and loss statement. The cash flow statement does not include net income, though – it just tracks the movement of cash (or cash equivalents) coming in and going out of the business over a specified time period.
How to compile a cash flow statement
Quick note: you should run this past your accountant but, essentially, a cash flow statement looks at three comparative income and expenses figures:
- Same month, previous year
- Same month, current year
- Same month objectives: this requires you to look at the budget and calculate how much you’d need to break even and how much you’d need to turn a profit
The cash flow statement should include outlying data points, like seasonal patterns and one-time events. It should also account for market conditions, trends, and future plans. The more context you have from the present and the past, the more accurate your forecasts for the future will be. Trust us – you’ll thank your past self for keeping all this data on record.
Okay, cool. Back to the original question.
It’s a good question. Your cash flow statement includes all projected expenses and income for the time period in question. If you’re working out a cash flow forecast for the year ahead, this will help you predict which months you’ll be swimming in a steady cash flow and which months you’ll need to draw the purse strings closed – tightly.
Well, it’s not that simple. Running a business sustainably doesn’t necessarily look like breathing easy when the cash is flowing and freezing in a state of anxiety-driven paralysis when you’re in a tight spot. A cash flow forecast (informed by a cash flow statement) helps you determine your cash position. In turn, this empowers you to make more consistent and informed decisions about whether you can afford to buy new equipment, hire more employees, or take out a small business loan to weather the storm.
Cash flow can be a fickle and unpredictable stream but, if you read our January business horoscope, you’d see that most businesses can anticipate busy months and slow months in their industry – but only if you’re paying attention. The more you use cash flow forecasting, the more accurately you can predict future patterns in years to come. And that’s not the only benefit of cash flow forecasting.
The benefits of cash flow forecasting
Looking at the past can help you prepare for the future – if there’s anything to be learned from your weather app, it’s that hindsight is foresight. In the same way, cash flow forecasting can help you determine when you can expect to prosper and when you need to be extra judicious with expenditures. But cash flow forecasting can help you prepare for less obvious patterns, too.
Comparing your actual income and expense figures to your cash flow forecast will tell you if the business is doing better or worse than you anticipated. If sales are higher or lower than you thought they would be at this point, it’s well worth investigating. Have new competitors entered the market? Are there new ways of doing business that you should be keeping up with? Has your customer support or quality control taken a hit? Why?
Cash flow forecasting is not what we would call an exact science, but it does help you identify areas of the business which would benefit from your attention. Considering how much is already piled high on the plate of the average SME owner, the clarity of this oversight is helpful protection against unpleasant surprises.
How else can I manage my cash flow?
Cash flow forecasting is a great business practice, but it’s a guide – not necessarily a solution. Considering the challenge which cash flow management continues to pose for most South African SMEs, you need to have more up your sleeve than just a cash flow forecast which tells you when good times might roll.
When the pawpaw hits the fan, what you want is quick, unhindered access to cash flow solutions which can see you through tough times. After all, there’s an abundance of business funding available to SMEs. That’s not the problem. The problem is that, as soon as that fleshy fruit comes into contact with the rapidly spinning blades of the ceiling fan, you have the equivalent of a few precious seconds to implement an action plan.
Most traditional lenders don’t have application programs in place that can support that kind of essential speed.
On the other hand, once you’ve qualified for a facility with Bridgement (which itself happens in about 24 hours), you can draw down what you need, when you need it. No monthly fees, and no months-long waiting periods. You’ll have access to your funds as fast as you can throw a pawpaw at the fan (do not test that theory at home).
Don’t wait until the cash flow forecast warns of stormy skies. Secure your Bridgement facility today so that you’ll have an ace up your sleeve, no matter how many paw paws are dealt at the table.
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