Every December, I like to find a big cinema screening of It's a Wonderful Life. A Christmas classic, not only is the film a story about appreciating what you have and never giving up. It also offers a lesson in the importance of cold, hard cash, and the importance of keeping a cash flow forecast. CASH FLOW LESSONS FROM THE FILM, IT'S A WONDERFUL LIFE

Played by Jimmy Stewart, one of my favourite actors, George Bailey, the owner of the Bailey Building & Loan is devastated to learn his Uncle Billy has lost an $8,000 cash deposit on his way to the bank. This was the entire cash position of the bank. And because of one careless moment, the Building & Loan is about to not only close its doors, but bankrupt almost everybody in town.

Desperate, our hero crashes his car into a tree, and is about to jump from the suspension bridge into the icy waters below when he hears splashing and a cry for help. George dives in and saves the drowning man. While they're drying off, the rescued man introduces himself as Uncle Clarence, George's guardian angel.

Clarence scolds George, saying it's ridiculous of him to want to kill himself over $8,000. Guardian angels have no need of cash! But of course cold, hard cash matters very much when you're in business. And the only way to know whether you’ve enough cash to meet your current and future liabilities is by keeping a cash flow forecast.

More than 50% of the business owners I work with come to me with cash flow problems. Every month is a struggle, juggling monies to pay suppliers and meet the payroll. They're on what I call the 'cash flow roller coaster.'

However it doesn't have to be like this. If you want to run a successful business, it's essential you become proficient at reading and understanding your financial dashboard, particularly your cash flow forecast.

Your financial dashboard is made up of three important gauges, which combined, will help you to manage your business. They are

  • The Cash Flow Forecast
  • The Profit & Loss Report (sometimes called a Net Income Statement)
  • And the Balance Sheet

Of the three financial gauges, the cash flow forecast is the most important. Here's why.

Why Your Cash Flow Forecast Is So Important

Cash is to business as petrol is to a car. Every business, just like every car, has its own 'burn rate.' This is the speed at which your car guzzles petrol - or your business burns through cash. A cash flow forecast, exactly as the name indicates, measures how fast money comes in and out of your business. Every Monday, I update my cash flow forecast. It doesn't take long – just a few minutes in my case. My cash flow forecast allows me to measure exactly how quickly my business burns through cash, - and look ahead to see whether there are any cash dips ahead.

Here are four basic questions your cash flow forecast will answer:

  • Does my business have enough cash to meet its bills for the next four months?
  • Is money going out faster than it’s coming in?
  • Are there any seasonal variations I need to plan for?
  • Do I need to to apply for a credit line?

If you invoice or have credit terms with your customers, cash payments from invoices may not materialise in the month the work was actually booked. So if income (net revenue) does not convert into cash in good time, this could create a cash crisis that threatens the viability of the business. That's why it is so important to update your cash flow forecast on a weekly basis, and not rely on your bank account for this information.

Wishing you a very successful marketing campaign in the run up to Christmas. And as always, thank you so much for reading my articles.

Question: What stops you doing a cash flow forecast? I love reading your feedback so please do take a moment to share let me know in the comments box below.

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Denyse WhillierComment