When it comes to cashflow, there are plenty of myths floating around, but falling victim to believing all the misconceptions can lead to financial trouble.
From myths like “profit equals cash” to “only large businesses need cashflow forecasting,” it’s easy to see how misinformation can lead to financial missteps. By debunking these myths and providing practical insights, we want to help business owners to make more informed decisions, ensuring they have the cash on hand to grow and thrive.
Understanding the realities of cashflow forecasting is essential for any business owner who wants to stay on top of their finances… and we’re here to show you how.
A common misunderstanding is that a profitable business will naturally have a healthy cashflow. It might sound like that’s the case, right?
However, profit and cashflow are two different concepts. Profit is the amount remaining after all expenses are covered, while cashflow concerns the real movement of money entering and leaving your business.
The Reality:
This is an easy mistake to make, as you can have a profitable business and still struggle with cashflow. For instance, if you have a lot of outstanding invoices or if your expenses are due before your income arrives, you might find yourself short on cash even if your business is technically “making money”. This is why it’s crucial to monitor and control your cashflow separately from your profit.
Another widespread myth is that cashflow management is only necessary for businesses facing financial difficulties – but this couldn’t be more wrong. Cashflow forecasting is crucial for all businesses, no matter how strong their financial position may be.
The Reality:
Even a successful, growing business can face cashflow challenges. Rapid growth often requires significant upfront investment in inventory, staff, or equipment, and can therefore strain cashflow. By keeping a close eye on your cashflow, you can ensure that growth doesn’t turn into a financial crisis.
You’d like to assume that boosting sales will instantly resolve cashflow problems, but in reality, growth can worsen these issues if not handled carefully and if it is not prepared for. Expanding your business often demands more working capital, which can put additional pressure on your cash reserves.
The Reality:
While growth can increase revenue, it also increases expenses. Without proper cashflow management, your business might not be able to keep up with the additional costs. It’s important to plan for the cashflow demands of growth and not just focus on the top line.
Many small business owners believe that cashflow forecasting is too complex or unnecessary for their operations, and disregard it’s importance. However, cashflow forecasting is actually valuable for businesses of all sizes.
The Reality:
Cashflow forecasting is an essential tool for businesses of all sizes. It allows you to predict cash shortages, plan for upcoming investments, and ensure you can meet your financial commitments. Even for small businesses, maintaining cashflow forecasting offers valuable insights, that can help you to make well-informed decisions.
Don’t let these myths mislead you. Grasping the reality of cashflow and cashflow forecasting is crucial for your business’s success. By understanding the distinction between profit and cashflow, recognising that all businesses must manage cashflow, preparing for the cash demands of growth, and appreciating that cashflow forecasting is not just for large companies, you can position your business for financial stability.
If you’re ready to take control of your cashflow, our friendly team of local accountants in Bedford can assist you in establishing a dependable cashflow forecasting system tailored to your specific needs.