Five Big Reasons to Forecast Your Cash Flow

Posted 27 January by Blaine Bertsch in Cash Flow, Entrepreneur, Small Business

We’ve all been there, lying in bed at night, wide awake, wondering ‘what if…’?

That ‘what if’ can be a multitude of things but, in business, it usually involves money. “What if we don’t land that contract we need to get us through the next quarter?”…”What if we do land it and need to hire?” “…the weather turns and sales drop 10%.?”

No matter if you have expansion in your plans or you’re entering a time of crisis, forecasting is critical for making the right call, soon enough. Unfortunately, too few small businesses take the time to regularly run the numbers. Here are five big reasons to forecast.

1. Business is about change

Business changes daily. Some changes are small and are almost unnoticeable until you look back. Other changes turn you on a dime. The market, competition, technology, economy, staff, a multitude of things can affect your business in a profound way.

The key to managing change is to recognize the issues early, predict the possible outcomes and adjust the course of action in your business accordingly.

2. Preparation Meets Opportunity

Luck is often termed as the moment “when preparation meets opportunity.” Too often, we have our heads buried in the day to day responsibilities, to prepare for just about anything but businesses are built by taking advantage of opportunities that come our way.

Forecasting can play a major part in identifying opportunity. Predicting what areas of your business will be most profitable in the future (not always the same areas that were most profitable in the past) will help you focus on your key opportunities.

3. Growing Pains

Business is about growth. You want your business to be profitable and healthy, serving more customers along the way. Unfortunately, growth isn’t easy. Generally, more work, more staff, more space, more equipment, more costs and more responsibilities come along with growth.

Many businesses can’t even afford to grow. Orders come in that they simply can’t handle yet those orders are tough to ignore. Spending time forecasting can help you predict and plan for growth before the wave hits you. The wave will likely still hit but at least you’ll grab a deep breathe and brace for it!

4. Defcon One

As Sheldon so eloquently states in The Big Bang Theory, “Defcon 5 means no danger. Defcon 1 is a crisis.” All businesses face crisis from time to time. Sometimes the crisis is easily overcome, other times the business will close their doors. Crisis usually involves money and dealing with crisis often occurs too late in the game.

Forecasting is a valuable tool for predicting budget issues and cash flow crunches ahead of time. The sooner you raise the flag, the sooner you adjust the course of your business and likely the less affect it will have on your operations. Identifying an issue early could mean you cut out travel, delay a capital purchase or put off a hire rather than laying off staff or asking the bank for a loan when it’s too late.

5. Sometimes It’s Just Caffeine

When I toss and turn, unable to fall asleep, usually there’s a freight train of ‘what ifs’ running through my brain. I’ve found that the simplest way to quiet those nagging thoughts is to have a plan. Deal with the nagging ‘what if’ monsters during the day. Identify them, document them and lay out a simple plan to deal with them.

Sometimes ‘forecasting’ gets a bad rap (see Nate Silver’s terrific book “The Signal and the Noise”) but it is a crucial part of business. It’s true, a long term business forecast can be a lot like predicting the weather on March first, two years from now, but predicting our cash flow two months out it is much more reliable.

The information and the intuition is generally there, you just need time to wrap your head around it. Take time, at least once a week (it really only takes a few minutes), to forecast the financial health of your business. Identify the opportunities and the threats to your business and have a plan for dealing with the issues as they come along. You’ll sleep much better.

Dryrun is a simple way to forecast your cash flow, build budgets and track sales projections.

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