Why cash flow forecasting is important for SMEs

Cash flow is the lifeblood of any SME, and a cash flow forecast will highlight what your cash position is likely to be over a defined period of time. The practice of regularly looking ahead can make the difference between success and failure and in times of uncertainty, business owners need to be able to accurately predict their cash position over the months ahead. Even a successful, profitable business can experience damaging short-term cash flow issues. If, for example, incurred expenses in producing your goods or delivering your service, leave the business before payment is received from a customer, you can end up in a negative cash position. Understanding when any of these cash shortfalls are likely to happen, is what makes cash flow forecasting essential for SMEs. By regularly looking ahead, and understanding when cash problems may arise, a business can be better prepared to take remedial actions to address them. This may involve reducing estimated spending in the period in question or looking for external financing sources to bridge any shortfall. Forecasting is particularly important for SMEs when there are significant changes in the trading conditions it operates in. As we have seen through recent years, smaller businesses have required agility and adaptability to deal with the challenges of both the pandemic, supply chain challenges, inflation and, more recently, recession. An essential component in this agility and adaptability is having financial resilience – smaller businesses should have enough cash in the bank to cover three months of normal operating expenditure – and owners need to be regularly forecasting to ensure that they have forward visibility their likely cash balance position. Significant changes can impact businesses of all sizes, and SMEs should look to increase their longer-range forecasting whenever their business proposition faces a potentially significant change. The following are examples of impacts that should encourage an SME to forecast more frequently and with a longer-term horizon. Recession or downturn in trading conditions In this scenario, a business owner might look to forecast supressed sales cash inflows in their cash flow modelling. The extent to which any recessionary period or downturn will impact a company’s sales performance will depend on the nature and sector of your business. Losing a major customer account If you are reliant on a small number of high-spending clients, you should model different forecast scenarios based on one of those clients being lost. This will help you understand what impact that will have on the business, and what actions may need to be taken as a result. Changes in consumer demand You should be attuned to how changing consumer dynamics might influence your product or service, positively or negatively. The growth of veganism and desire for locally produced foodstuffs are good examples. Sustainability is another major driver in many segments which might influence buying decisions. Supply chain price increases The recent inflationary period has resulted in many price increases throughout the supply chain. These price increases can have a disastrous effect on your cash flow, at least in the short term. Cash flow forecasting should identify the impact of any known, or predicted, cost increases on your cash flow position and closing balance. Analysing this, before they come into effect, can help businesses determine their own pricing plans or take cost-cutting action if prices are fixed. Being able to adapt to change, however it comes about, is integral to any business’ success. But for SMEs, the speed at which adaptability can be implemented can be a major business advantage. This is why your cash position and understanding your cash flow is so important. Remember cash flow forecasting doesn’t need to be complex and laborious. Start with a simple system by looking at what revenue you are forecasting over the next three months and what the overheads and cost of sales are likely to be. It’s better to have a forecast in place, however imperfect, than to ignore issues that may arise in the future. At Capify we offer a range of business loans to help support your business through high and low periods. Check to see if you’re eligible for one of our loans with our online eligibility checker. Or, if you’d prefer to talk to a member of our team, we’d be happy to guide you through the process. Give us a call today on 0800 151 0980.

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Why cash flow forecasting is important for SMEs

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