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Over-reliance on cash flow forecasts is not advisable, but if it does happen, there can be consequences outside of just negative cash flow. Leadership can develop tunnel vision from over-reliance on cash flow forecasting Therefore a cash flow forecast should simply be used for guidance and should not be fully relied upon. Additionally, it is important to be aware that cash flow is not the same as profit, and prolonged periods of positive cash flow are not a definite indicator of future business success.īusiness can be unpredictable, and cash flow forecasts are not designed to anticipate future market changes, shifts in sales demand, inflation or other factors outside of your business’s control. If a forecast predicts prolonged periods of positive cash flow this can cause businesses owners to fall into a false sense of security. To increase the accuracy of forecasts, compare projections to actual bank statements for the same period and adjust future forecasts accordingly to create a more accurate picture.Ĭash flow forecasting can create a false sense of securityĬash flow forecasts are just that, forecasts. There are also some disadvantages of cash flow forecasting that all businesses should be aware of before relying on these projections too heavily.įorecasts are based on estimates and probabilitiesĬash flow forecasting is based entirely on projected estimates and probabilities, and because of this, plans become less accurate the further into the future they extend. So your business can more easily work through this upcoming negative cash flow period.Īdditionally, you could see that a prolonged period of positive cash flow means you have enough surplus cash to invest in new equipment or processes that could benefit your business in the long run. With this information, you can save your positive cash flow balance and bring it over into the next month to help cover expenses that cannot be accounted for using sales revenue alone. Using cash flow forecasting, however, you notice that next month you will see a drop in sales and a negative cash flow. Being aware of when you will have surplus cash available will allow you to use this positive cash flow balance to your advantage.įor example, you may experience fluctuations in sales across different seasons, and over the next month you are expected to experience positive cash flow in line with this. Just as cash flow projection can be used to identify periods of negative cash flow, it can also be used to predict periods of positive cash flow. Ensuring that your business does not invest in a decision that could jeopardise cash flow over the long term. Additionally, this also supports more informed decision making as you will have the financial information to either push for or reject certain business ventures. Support more informed business decision makingĪs mentioned above, playing out hypothetical scenarios using cash flow forecasts can help to understand the risk or reward of new activities. Using cash flow projections, you can play out the financial implications of hypothetical business scenarios such as investing in new production equipment, offering next day delivery offers, or understanding the cash flow implications of launching a seasonal product range. Scaling and growing your business always comes with a degree of risk. By identifying these clients, you could create more strict credit periods to improve your cash flow and avoid periods of negative cash flow due to these late payments. Allowing you to see areas where you may be overspending and could cut costs to improve cash flow.Ĭash flow forecasting can also give you insight into clients who regularly pay late and impact your cash flow. This is a particularly important benefit of cash flow forecasts for businesses who experience significant seasonal sales fluctuations.Ĭreating a picture of projected cash outgoings over a given period can also allow you to more closely track and understand your regular business expenditures.
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By identifying potential future cash flow gaps, businesses can take measures to prepare for these such as reducing cash outflows for that month, using credit to pay suppliers, or saving surplus cash for these periods. The nature of a cash flow forecast is to understand whether a business will experience positive or negative cash flow in future periods. There is a great range of benefits of cash flow forecasts for eCommerce businesses, aside from gaining a granular view of business transactions.