Why Cash Flow Forecasting is Crucial for a Business

Cash flow and liquidity have gained great importance in the business world at the expense of profit and profitability indicators. The underlying approach is the fact that although a business may have a solid profit at the end of a financial year, liquidity situation cannot be so good, and the exclusive focus on obtaining profit without regard to the available cash cushion may even push the business into bankruptcy.

Accurate cash flow forecasting can help in anticipating future cash surpluses or deficits and help you in making the right decisions in planning acquisition of new assets, contracting of financing lines, giving up some customers or suppliers etc.

By considering a sufficient number of scenarios, you can predict the behavior of your business in the worst case scenario, needing capital injection, or in the best case scenario, when business is performing better than expected. Anticipating correct signals can identify temporary liquidity shortfalls and provide solutions for their coverage. Moreover, correct prediction of surpluses can offer the possibility of earning high returns on short-term investments.

Here are some major reasons why cash flow forecasting is of high importance:

:• You will have the real financial picture of the company’s solvency in advance;

• Getting the accurate analysis of cash inflows and outflows from the operating, investing and financing activities;

•  Identifying the causes of why the inflows/outflows were higher or lower than expectations;.

• The market pays great attention to the medium and long term outcomes , not just short-term performance and cash flow statement is the most intuitive of all financial statements performed by a firm.

REMEMBER : When planning for the short or long term financing  needs, a business must pay close attention to forecasting the cash flow rather than calculating profitability metrics. Experience teaches us that most businesses fail rather due to lack of cash (liquidity) than profits.