The cash flow can be simply defined as the estimate of the time and amounts of cash inflows and outflows over a specific period (usually monthly or yearly). A cash flow forecast helps an organisation manage all liquid or cash resources – including the timing and availability of funding options to manage the immediate operational and capital requirements. This process is also known as the cash flow budgeting.
When a business enters the market which is no less than a war zone, a clear cut vision of all possible scenarios is kept under consideration. If a business runs out of cash and is not able to obtain new resources, it will soon fade out of the picture because of its inability to cope up with emerging challenges and tasks. It helps the management to plan for that situation when the availability of liquid assets is critical for the operations of the company.
Among the numerous reasons as to why the cash flow forecast is important are the ones mentioned below.
Cash flow forecast is an important tool in terms of ensuring the longevity of a business. A warning sign before the hazard helps in being prepared for the worst and gives a sufficient amount of time to think for alternatives. Similarly, the cash flow forecast makes sure everything goes as planned without issues.
When employees are not paid on time or if the supplier is not handed over the money by the due date, it becomes a chaotic mess that needs to be sorted out efficiently. Therefore, a heads up regarding the employee manager relationship makes sure everything works in harmony. This forecast also ensures you have enough cash to pay suppliers and employees.
Every work, if done in a disciplined fashion creates a comfortable environment for the workers as well as the consumers. The cash flow forecast adds to this by enabling a synchronised management system, which in return helps in forming a cash flow budgeting body.
In addition to the above-mentioned reasons, the cash flow mechanism helps in identifying the timing and magnitude of tax payments and so plan them accordingly. For example, if you are considering pension contributions before the business or tax year-end.
Precaution is better than cure. This phrase pretty much sums up the whole idea of forecasting the cash flow mechanism in the business world. A beforehand planning leads to ensuring quality work being produced at the end of the day without any wastage of time or resources. This may also assist in identifying areas of weakness, which need to be dealt with immediately by taking remedial actions – for example, customer credit policy or inefficient collection process. Every business should consider what form of cash flow forecasting works best for them by keeping in mind the scope of work being done as this could serve as a powerful tool for keeping in strict check and balance on the business finances.