The benefits of Cash flow Forecasting to avoid Month-End Madness
The saying “CASH IS KING” will never get old and there is a reason for this. Your company can have a fantastic bottom line, but if your cash position is not good, negative or continuously on the decline, it won’t take long before your company needs to borrow cash.
MONTH-END MADNESS
Very often, a small company’s attention is focused on their products being manufactured and sold or their services being delivered, leaving company administration and its financial position to chance, or ending up in what I like to call, month-end madness. If your company gets to month-end and it’s a stressful mad dash to settle bills, pay salaries and the tax man, often while needing to arrange a line of credit from your bank manager, you are suffering from month-end madness.
Whilst month-end madness could indicate underlying problems in the business, which you would need to identify and rectify, it often comes down to not understanding your cash inflows and outflows for the coming days, weeks and months ahead, which is where cashflow forecasting comes in.
CASHFLOW FORECASTING
Cashflow forecasting is the continuous process of recording your current cash position, as well as your known incoming and outgoing payments and then forecasting the balance of your receipts and payments for the forecasted period. Forecast periods are typically daily for the week ahead, weekly for the balance of the month, then monthly for up to 12 months, but vary depending on your company’s situation.
At a minimum, your cashflow forecast should be updated twice a week, but can be done more frequently depending on the time of month or the cashflow situation of the company.
The picture shown by your cash flow forecast can be very telling and shows the expected periods of cash flow shortfall or excess. The benefit of the cash flow forecast is that it gives you advanced warning of when your company will be short of cash, allowing you to make alternative arrangements such as requesting debtors to pay sooner, pushing supplier payments, arranging an overdraft, shareholder injection or loans.
Additionally, month-end madness can be aggravated by poor management of debtors, creditors and inventory management policies and procedures.
Should you need assistance with reviewing your company’s position or setting up controls, CompassPoint Consulting is here to assist you.
