Cash is king!

If a business runs out of cash and is not able to pay bills when they fall due, it is insolvent. There is no excuse for management to claim that they didn’t see a cash-flow crisis coming.

As we all know “cash is king”.  Cash-flow is the life-blood of all businesses and as a result, it is essential for management to forecast what is going to happen with cash-flow to make sure the business has enough to survive.

Having a robust cash-flow forecast will help is so many ways:

  1. Identify potential shortfalls in advance – It’s an early warning system and probably the most valuable reason for having it.
  2. Make sure that the business can afford to pay suppliers and employees.  If suppliers don’t get paid they will stop supplying you but even worse is employees not getting paid.
  3. Helps you identify problems with customer payments – preparing the forecast requires you to look at how quickly your customers are paying you.
  4. As an important discipline of financial planning – the cash flow forecast is an important management process, similar to preparing business budgets.
  5. If you have borrowing or may need to borrow in the future lenders may require a regular forecast. Certainly if the business has a bank loan, the bank will want to look at cash flow forecasts at regular intervals.