The importance of cash flow forecasting
Having enough cash and a sound cash flow forecast determines whether a business will succeed or fail. But preparing good cash flow forecasts and dealing with cash shortages is unfortunately a key challenge faced by SMEs.
The 2017 SME Development Survey by DP Information Group showed that more than a third of SMEs in Singapore faced finance-related issues in 2017. Delayed customer payments was cited as the dominant issue, which increased the risk for cash flow shortages.
You might remember the news about Honestbee, the once high-performing grocery delivery start up that recently hit the headlines. The company has suspended its food delivery service in Singapore as well as some of its overseas operations.
The main reason for its downfall? Cash flow problems.
How did a company that had raised millions in funding find itself in this situation?
Causes of cash flow shortages
While there is little clarity on Honestbee’s finances, the company’s overly rapid expansion and therefore high burn rate is seen as the main cause of its problems.
Many business owners also face situations where they have to cover costs upfront, which becomes a further concern when clients do not pay them on time.
The 2017 SME Financing Survey by SPRING Singapore (now Enterprise Singapore) found that 64% of SMEs faced delays in customer payments, and that this was the top concern they expected to face in the coming year.
However, such factors can be prevented with proper cash flow management, or keeping track of the money moving in and out of the business.
Profit IS NOT the same as having cash
If a business is profitable, it should be flowing in cash, right? Not necessarily.
Even if sales and profits are growing, it can take 30 days or more for invoices to be paid. Meanwhile, your company has expenses and bills to pay.
Without proper cash flow management, you may find yourself short of cash and unable to pay your bills or your employees.
Businesses that focus solely on revenue and profit but have poor visibility into their cash flow can fail!
The solution: Cash flow forecasting
Besides staying on top of accounts receivable (amount of money owed to a company by its customers) and drawing up clear payment terms, businesses should create a cash flow forecast to avoid unexpected crises.
A cash flow forecast pulls data from different functions within a company such as finance, HR, sales and operations, to estimate the company’s cash inflows and outflows.
It not only allows you to understand the company’s real-time cash position, but also determine the cash required to grow the business in the long term.
Cash flow forecasting is crucial for business success because it can help you predict any potential cash shortfalls ahead of time and plan for ways to cover costs. It allows a company to make important decisions such as whether it needs to cut down on operating costs or if it can afford to hire a new employee.
Businesses with carefully managed and healthy cash flows are also more eligible for bank loans or funding from investors.
Improve efficiency with cloud-based accounting solutions
Cash flow can be more efficiently managed using cloud-based accounting tools that automate payments and ensure seamless bank reconciliation.
Shaft Ph has partnered with the cloud-based solution Xero. The platform give you a real-time view of your company’s finances, so that you have a clear understanding of how much actual cash you have.
Xero integrates with Float, a cash flow forecasting tool that imports invoices and bills from Xero to update forecasts in real time. We have successfully used Float to build forecasts and scenarios for our clients, providing them with actionable insights into their present and future cash flows.
Want to make smarter business decisions and grow your company sustainably? Contact us to find out about our cash flow analysis and forecasting services.
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