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Updated: 18th February 2020

Analysing Current Cash Flow to Ensure Future Financial Stability

Cash flow forecasting helps you maintain a positive cash position, and assists in growing your business sustainably. It’s vital to know how much cash you have to work with at any given time as an unexpected shortfall can result in failing to pay the bills as they become due.

This is one of the signs of insolvency so forecasting also protects your business from the threat of closure, but how do you use it to inform business decisions and plan for the future with confidence?

Using cash flow forecasting in your business

Your overall cash position as a business can be affected or disrupted by many factors, including:

  • Late payers
  • Unexpected bills
  • Increases in your own supplier payments
  • Loss of a customer
  • Overtrading

Having to pay suppliers before you’ve received payment from your customers is a common scenario, and there’s often a significant period of time between cash leaving a business and the money from sales being received.

Poor cash flow can lead to difficulties with regard to fulfilling orders – it can slow down growth and even impact on customer service and business reputation. Strategically tracking cash movements helps businesses overcome this frustrating position.

Three-way forecasting

Three-way forecasting integrates cash flow with profit and the balance sheet. It provides a more in-depth view of the company’s performance and can reveal issues that may otherwise go unnoticed.

The profit and loss account shows the company’s revenues and day-to-day expenditures, and when used alongside a cash flow forecast shows that the business can be profitable but still have poor cash flow. So the business could be highly profitable, but unable to pay the bills as they fall due.

The other element involved in three-way forecasting is the company’s balance sheet. This shows you the assets held by the business, its liabilities, and equity, and reflects movements in cash that aren’t shown on the profit and loss account.

"Poor cash flow can lead to difficulties with regard to fulfilling orders – it can slow down growth and even impact on customer service and business reputation."

The benefits of three-way forecasting

Capital purchases and capital repayments, company financing, and prepayments and accruals, are just some of the movements tracked in the balance sheet that affect cash, and although the balance sheet is a record of the situation at any given time, comparing your forecasted figures against the actual results is highly advisable.

It allows in-depth analysis of important issues that may be occurring in your business, such as:

  • A drop in the gross profit margin
  • A fall in sales
  • When a supplier is charging more
  • Falling sales figures for a particular customer

Using three-way forecasting

It’s advisable to compare each line of your forecast figures with up-to-date actual results to achieve the most benefit from three-way forecasting – you’ll be able to react quickly to any adverse changes or needs, and prevent a potentially damaging cash shortfall.

Tracking changes in cash availability using three-way forecasting informs the future of your business. It allows you to make better business decisions using a combination of current and historical information, and gives you a competitive edge via in-depth insight.

If you want to find out more about cash flow forecasting and three-way forecasting, RBR Advisory can help. We will advise you on how to implement these methods, and tailor them to your own business needs. Please contact one of our partner-led team – we offer free same-day consultations and operate an extensive network of offices throughout the country.

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