M4D Winter Release 2019

The Importance of Cash Flow Forecasting Often, when Management for Design asks business leaders if they control their cash flow, we hear a resounding “yes!” But when asked how they do it—the response is usually a more tentative “well... we check the bank account every day.” This is not an effective cash flow management strategy!

Firstly, your bank account is a historical record of the comings and goings of your money. Unless you have a proper plan in place for how you are generating money and how it will be spent, simply reviewing the bank balance daily will not make it grow!

One of the most important tools in business is a cash flow forecast. Would you ever sit in a car, put a blindfold on, and then start driving? That’s what managing a business is like, if you don’t have a cash flow forecast in place.

Three things to set you up for success 1. Know how to differentiate between profit and cash 2. Create a cash flow management system, including a safety bank balance 3. Review and manage your cash flow regularly Know how to differentiate between profit and cash Firstly, profit and cash are different. Profit is a measure derived from income (revenue) less expenses and is reported in your income statement. Cash is simply the money you have in your bank account.

Each business transaction will affect your profit and cash in different ways—and at differing times. Paying tax, purchasing computers and equipment, waiting on debtors to make a payment, or the creditors you haven’t paid yet affect your profit and cash position differently. Most of the time, the effect on your cash position can be delayed and occur after the change in your profit position.

So, which one’s more important? Profit or cash? The answer is actually more complicated—and the two are interrelated.

As your business develops, the more you will probably need to invest in systems, equipment, additional people, and premises—all of which require cash. In most cases, you’re investing this cash before you earn any additional profit, so to make more profit or grow your business, you will require more cash. Of course, you can also borrow it or receive it from shareholders or investors, but the point is, to understand how cash and profit impact each other.

In saying this, the age-old saying “cash is king” usually prevails. There have been plenty of profitable businesses that were forced to close down because they ran out of cash. Having a loss on your Profit & Loss statement (P&L) doesn’t mean you’ll go out of business, running out of cash is much harder to recover from.