Why Every Business Needs Long-Term Cash Flow Forecasting

Originally posted by Futrli, over here.

Looking up to the night sky, you realise how small we are on our planet. The sheer size of space, something we can barely get our heads around, accompanied with how far away it is reminds us we lack control. While in the universe we have pretty much no say in what happens, you can use a forecast to see projections for our economy and the obstacles that may trip you up. If you think about how much impact a short-term forecast can have on your business, looking further ahead still will definitely give you a sense of security.

Looking ahead to the future with the help of the present will give you a solid idea of how you’re performing. You need to be sure that more cash is flowing into your business than flowing out, and you’ll only know this if you forecast.

So when you’re operating day-to-day, and have plans for your business to stand the test of time, you need to be forecasting both short and long-term. To bring this right back to basics, here’s a quick breakdown of the differences you’ll see with these different time frames, and then we’ll have a look at the benefits of looking further into the future.

Short-term forecasting

If you’re looking ahead to a short-term, perhaps a year or under, then you’re looking at what will happen immediately. You’re probably already doing this to an extent as you always need to know how things are looking so you can judge what decisions to make about investing in new stock, or similar. A great example of a short-term forecast which would last a month or two is in retail. Let’s say you’re putting on a sale to get rid of some of your old stock. You’d put the new reduced prices into the forecast to see how much revenue you’d get from it, for example.

Long-term forecasting

Longer-termed forecasts will include such things as economic peaks and troughs, inflation and politics. Because we can never know exactly what will happen next – think Brexit and Trump – creating a long-term forecast will only ever be a guess. However, because you’ve created one it’ll help you to think outside the box about where the country/world economy may be, and how you’ll build your business to the point it can withstand these changes.

It’s like if you were going for a job interview. You’d plan your short-term by preparing for the questions, sorting your smart attire and journey to the offices, etc. Many people may not see past the interview itself, focusing all of their energy on charming the interviewers and making themselves come across well, but what if you do (or don’t) get the job? You need to have a contingency plan for both: if you don’t get the job it’s back to the hunt, but if you do then you need to be ready to excel in the role and fit in well with the team. Thinking of this in this way is easy to relate to, but you need to be thinking in this short/long-term way otherwise you’ll back yourself into a corner.

But back to (your) business. You’re running your company well, but how do you know how you can achieve sustainable growth? How do you know if each and every employee is working to the best of their ability? Do you know what you’d do if X, Y, or Z happened?

Rather than a short ‘shelf life’, make sure your business is ready to be weathered and will withstand whatever happens next

To grow sustainably, you need to have a really deep understanding of your figures. This can only happen if you’re constantly checking in with the ins and outs of your accounts, and forecasting for different eventualities. You’ll know when you’re due to be paid, when you need to pay out to suppliers or similar, and can adjust if need be.

In some industries, like manufacturing, a lot of costs can occur up front, so knowing you have enough cash for this before you’ve even sold anything is crucial. Similarly, invoice payments can be delayed and sometimes you simply won’t get your money on time. People conveniently forget to pay, go into administration or whatever else, so having a backup plan for such things is imperative. Using your forecast, you can add scenarios (more on those shortly…) to ensure you have a ‘plan B’ for these kinds of problems.

Hopefully, you’ve hit a point (or are approaching a point) where you’re feeling ready to expand. This may come in the form of taking on new premises, or hiring a new member of staff, or perhaps investing in some new kit. All of these are intended to impact your bottom line for the better, so when you are looking to do so, you need to know you can afford them.

So let’s use the new hire as an example. You need a new person to take over a few roles within your business, and think you can afford to hire straight away. Studying your forecasted figures in the long term is going to indicate whether or not this is a good plan; look at your sales figures and how they’re expected to look for the long-term. This will show you whether or not the investment in a new hire is going to be worth it, and if anything went awry if you could still afford it.

You’re able to make life-changing business decisions with confidence: look to the future and ask yourself where you want to be next year, the year after and in 5 years. In all likeliness, you’re spending most of your days fire-fighting, but scenario planning will see this become less and less necessary. It’s there to help you navigate the uncertainty.

Wardles works with Futrli and Xero to track your KPI’s, scenarios and forecasting. Get in contact with us today to see how to forecast your long-term success!

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