Everyone knows that cash flow is important. But how important is cash flow forecasting and how is it best achieved? I spoke with the experts at Float to find out more and explore their acclaimed cash flow forecasting Add-on for Xero.
Why is cash flow forecasting important?
1. Too little cash is life-threatening
Surging sales and margins alone will not be enough to save you from bankruptcy if you run out of cash. It’s obvious to every business owner: Running out of cash can kill even the most profitable of businesses.
2. Too much cash is growth-threatening
What would you do if someone just gave your company a cheque for £25k? I doubt the answer would be ‘keep the money in our business bank account’. You would instead invest it in whatever you believed would drive the growth of your business, be it your latest AdWords campaign, a temporary promotional discount, or new laptops for the team.
The thing is, you may already have that £25k available to invest. Without great cash flow forecasting you just can’t be sure enough to go ahead and do it.
3. Surprises are bad for business
Proper cash flow forecasting routinely involves assessing ‘what-ifs’ in relation to cash flow. We used to run a back office software business where a single sale might contribute up to 25% of our cash for a given month.
We would look at our confidence in every sale opportunity and then properly assess the cash flow implications of our best and worst case scenarios. This meant we were never surprised by our cash position.
Surprises of any kind, particularly those about something as important as cash, are very expensive to businesses in terms of lost management time and focus. Understanding the best and worst case scenarios far in advance of them arising allows you to prepare faster, and better.
Float’s own cash flow forecasting App offers a particularly handy feature for eliminating surprises in the form of its “Scenario Layering” feature. This allows you to operate with your Base forecast (what you expect to happen) along with many other parallel forecasts including those realised by your most pessimistic and optimistic assumptions.
Can we just use a spreadsheet?
Sure, and spreadsheets are a very common way for businesses to start forecasting their cash flow. However getting your forecast right and keeping it up-to-date takes up a lot of time and it can be a tricky process. Fortunately, Float have published a great little article here on the pitfalls of using spreadsheets for cash flow forecasting.
In addition to the various practical difficulties in using spreadsheets for forecasting, businesses should also consider the risk of having the knowledge, support and development of their cash flow forecasting model dependant on just one or two people.
For those businesses that wish to avoid these issues, dedicated tools like Float offer a much more accurate, efficient and scalable way of cash-flow forecasting.
What makes Float great for cash flow forecasting?
1. Automatic integration with your accounting system
Unless your business is very small and relatively simple, maintaining a cash-flow forecast manually is a lot of work, and it’s easy to get things wrong.
Float takes away the manual elements by seamlessly syncing up to your accounting system and pulling through all of your invoices, bills and bank accounts. It is always up-to-date with that same single version of the truth that the rest of your business relies on - your cloud accounting data. The result? Less work and fewer errors.
2. Ease of use
In the past, most cash flow forecasting software was targeted at accountants to help them manage the requirements of complex businesses.
My first impression of Float, as confirmed by their team, is that Float was built for business owners, not accountants.
The product features a small number of simple screens that closely resemble familiar spreadsheet layouts coupled with labels that makes sense and buttons that do what you’d expect them to do - already got your budgets in a spreadsheet? Then you can just copy and paste them straight into Float.
At Instafile we believe that ease-of-use is a necessary requirement in modern financial software: The days of these products having steep learning curves and being exclusively for accountants and other domain specific experts are long gone.
Float is very powerful and it is underpinned by some complex processes but it is also easy to use and it keeps its users firmly insulated from any complexities.
3. Great support
Float offer an excellent onboarding process that can include a screen-sharing setup and training call on request. They couple this with a live chat support service that, in my experience, has proven very responsive - even to technical questions.
In addition, while I don’t want to reveal any details of Float’s roadmap, what is evident is that they have a clear picture of the new features their users want and they are building them right now. Seemingly all of them!
Great support is about more than just helping businesses with the current product - it’s about evolving and future-proofing the product to the benefit of those businesses and the Float team clearly understand this.
What businesses would benefit most from a dedicated cash flow forecasting tool like Float?
1. Businesses that already do cash flow forecasting
Experience has taught the team at Float that any business already forecasting cash flow (even in spreadsheets) is a business that can really appreciate the benefit of moving to Float.
2. Growing businesses that have realised they need to start cash flow forecasting
If you’re growing, then you’re already doing a lot of things right and your company is on a trajectory that will require a dedicated cash flow forecasting tool like Float fairly soon.
There is little point in redirecting already well-deployed resources in order to build and manage a bespoke spreadsheet-based cash flow forecasting system. Get it right from the start: Keep the team focussed on driving growth and start giving them highly-reliable cash flow forecasts to help them make even better decisions.
3. Startups and other externally funded businesses
Float is a great choice for Startups and other businesses that have received external funding and have a responsibility to report to investors. It is cash flow that determines the current runway for any Startup and reporting it, along with any interim run-rates, is an essential part of compliance. This also extends to being good practice for businesses that are seeking to raise money - a professional cash flow forecast will be a prerequisite for many potential investors.
4. Businesses with five or more people in the team
A team of this size usually means a certain cost base and that money is being spent and forecasts being made by different people. The scale and complexities this introduces would often make a dedicated cash flow forecasting tool a smart investment.
5. Businesses with a turnover or operating cost that exceeds £250k
All businesses are different but if your sales or cost base is reaching this level then you are in principle a good candidate for using a dedicated cash flow forecasting tool to help you find spare investment cash and avoid any unwelcome surprises from your bank account.
The points above provide general guidance on whether or not a dedicated cash flow forecasting solution is right for your business. That said, all businesses are unique and the best way to be sure if Float would work for you is to contact the team or sign up for a free 30 day trial.