Managing Based on Current Cash Balance

When does it make sense to evaluate cash flow on just the current bank balance? If you have an innate knowledge of how all cash moves in your business and when, then it might make sense. But even then, you could still make a crucial mistake due to incorrect assumptions, and suddenly you can’t make payroll or pay a key vendor on time. For everyone else, cash flow forecasting is your friend. Putting down in a spreadsheet, forecasting software, or even paper, your expected cash inflows and outflows for a certain period of time will go a long way in making sure you don’t find yourself in a cash crunch. Formally forecasting cash allows you to see a crunch before it happens. It might trigger you to push harder on collections, delay payment of a trade vendor, or discount some merchandise in order to generate cash sooner. Cash flow forecasting isn’t just another task to complete. It’s a valuable tool for avoiding catastrophic events (like missing payroll or a government remittance), but also identifying when you might have excess cash available, which can be used to invest in equipment, pay a dividend, or make extra payments against debt.