“If you have to forecast, forecast often” (1) and I would say, you HAVE to forecast.

I meet with many small business owners and I’m always interested to hear their plans for their business and long term goals. It is however more interesting and somewhat surprising to hear that a number of business owners are not regularly forecasting. Without forecasting, it is impossible for a business to know the future finances of the business and most importantly, if they will run out of cash.

Cashflow is the lifeblood of any small business. It really does not matter how well you think your business is doing, it simply will not survive if there is more cash going out than money coming in – whatever the reasons. Running out of money without realising it, is the worst thing that can happen to a business. So looking ahead is crucial.

In simple terms, cash flow forecasting is about predicting future levels of cash to ensure your business has enough to survive on. The result of a cashflow forecast is an estimated bank balance at the end of each period covered. When done effectively, cash flow forecasting can even work seasonally, meaning that you can plan for specific variations in cost depending on the time of year.

What we know about the environment for a small business

Whilst there appears to be an improving trend for cash flow management in the UK, failure to manage cash flow is still a significant cause of small business failure. In a Department for Business Innovation and Skills report (2) see Table 8.1 below, cash flow was mentioned as an obstacle by 42 per cent of SME employers.

Obstacles to the success fo business


Managing the underlying causes

There are a number of reasons that can cause problems with cashflow; increased debtor days, inadequate credit control, bad debt, late invoicing, and even poor accounting practices can all be culprits and should be subject to careful scrutiny.

Late payments from customers is one of the biggest challenged. According to a report from ABFA sub £1 million businesses are having to wait for an average of 71 days for invoices to be paid (illustrated in the table below). So, it seems that the smaller the company the longer it waits to be paid!

Average wait for payment


Inadequate credit control is one to watch.

It is not uncommon for SMEs to neglect the credit control function. And when your main focus is sales, tight credit control can sometimes be perceived as a restriction.  If you are more focused on extending credit terms to support sales rather than ascertaining the creditworthiness or payment history of prospective clients, you could be storing up a world of pain.

As is the case so often, it’s in the mix, and getting the balance right is critical for the effective management of your cashflow.

Cashflow first

Being profitable is no guarantee of avoiding problems if there is insufficient liquidity in a business. That is why, for many small businesses, cash flow can be a more pressing issue than profit.

Writing for Real Business, Dr Stephen Fear says: “Certainly making a profit is essential if a business is to prosper long term, but I would argue that cash flow is the single most important thing to worry about in the initial stages of creating a new enterprise”. (3)

“Unless you watch your cash flow, your new business may not be around long enough to show a profit!  Cash, as they say, is king, but in this context, cash flow is certainly queen.” (2)

Cash flow forecasting is essential, to safeguard the future of your business. Only by preparing for future bumps in the road, will you be able to experience a smoother ride. With a clear roadmap in place, you can manage risk, make better decisions and be better equipped to deal with the most unexpected of circumstances.


Key points for managing business finances

I have purposely focused heavily on cash flow forecasting in this article as it is clearly one of the key factors to business success. In summary, I think there are a number of key points to keep in mind when it comes to managing your business finances:

Imagine the worst
Managing cash flow means having enough money coming in to cover what you have to pay out. But getting the balance right can be tricky, because suppliers and customers have different priorities. Keep in mind that businesses often go bust because of a lack of cash, rather than a lack of orders or profits. Work out what a late or non-payment would mean for your business and have a backup plan in place.

Make a plan
Develop profit and cash flow forecasts and ensure you have an organised approach to managing your finances. Planning gives you the opportunity to ask the right questions of your business and to avoid costs at the wrong time.

Be brutally honest
Forecasting provides visibility of your business finances and will help you to identify problems that may not just be the fault of late paying customers. You may need to accept that poor cash flow is the result of something more fundamentally wrong such as an unpopular product or high cost of sale. If you see or suspect a problem, act on it quickly before it’s too late. Many businesses have failed in the past because the directors did not act quickly enough.

Protect yourself against bad debt
At the very least, learn as much as you can about potential customers and their credit worthiness.  Work out whether you have the cash reserves, overdraft or credit facilities to cover a bad debt.

Do your bit
Most customers will be happy to pay for good products or services. Don’t give the customer any excuse not to pay; make sure orders are on time and complete.

Get paid promptly
Don’t let the glow of a significant sale or a lucrative new contract blind you from the need to ensure prompt payment. Negotiate payment terms and try not to let your customer make you move from your standard terms. Also aim for progress or stage payments if you are in a business with a longer delivery cycle.

Practice what you preach
You expect to be paid in a timely manner, so make sure your suppliers receive timely payment from you, within the terms of your contract. It’s the right thing to do, but it also makes sound business sense.  Business is about relationships and so when times are tough suppliers are more likely to be supportive if you have traditionally paid invoices on time.

Think differently
If cash is tight, you could consider leasing assets rather than buying outright or consider alternative methods of payment or finance for services.  Finance options can help “even out” expenditure over the year rather than having large peaks and troughs.

And one final thought; taking the time to forecast each month is much, much cheaper than failing.



  • (1) Edgar R. Fiedler in “The Three Rs of Economic Forecasting-Irrational, Irrelevant and Irreverent”, June 1977.
  • (2) Small Business Survey (published in 2015) by Department for Business Innovation and Skills
  • (3) Dr Stephen Fear is an English Entrepreneur, Businessman, Philanthropist and Author