Discussion – 


Discussion – 


Cash Flow and Financial Forecasts: Why the Difference Matters

Piles of coins; Numberslides helps you manage your cash flow

When talking about cash flow forecasting and financial forecasting, the two often get confused and the differences get overlooked. We’ve often heard founders talk about their ‘financial forecasts’ when referring to their cash flow forecasts. 

Knowing the difference and preparing two different forecasts will have a substantial impact on how you present your business plan to an investor. Understanding your cash flow and understanding your financial forecast will give you much greater insight into your business as a dynamic entity, not just a collection of numbers on paper.

What Is Financial Forecasting?

When you create a financial forecast, you are creating a prediction or estimate of future financial outcomes for your business, start-up, or project based on revenue and profits, money coming in and out. This is often a useful exercise if you are setting budgets.

What Is Cash Flow Forecasting?

Cash flow forecasting is also about estimating future financial outcomes, but the focus is less on the endpoint (where will you be in 5 years?) and more on the timing of different streams of money ebbing and flowing in and out of your accounts over the next 5 years. This is often used to assess your investment need (cash shortfall) and your ability to cover your costs.

Both forecasts are anticipations of money, but cash flow forecasting focuses on the cold hard fact that ‘cash is king’. Cash is the bloodline of the business, and if you’re not careful, confusing profit with cash can create problems when pitching to investors and securing investment.

Everyone Says “Cash Is King”. So What?

Sometimes it’s easy to think big and focus on the profits. What we sometimes forget to do is look at the reality of your day to day business activity. This is where lack of cash management can be crippling to a business.

When you create a cash flow forecast for your business, you are estimating how much you will have after anticipated (not guaranteed) payments and their timing. You are also looking frankly at the timing to receive your revenue in the bank account (credit you give to customers) and the timing of the costs that you will have to pay either upfront or after a period of time (days of credit). Costs can include:

  • Salaries for employees, freelancers, or contractors
  • Suppliers, for materials, services, or support
  • Other costs, like office rent, travel expenses, conference fees for networking

This list of costs goes on and also varies from company to company.  The point is, you might be rolling in cash in February, but after paying salaries out for 3 months, and with no payments from customers expected until June, your funds could run dry by May. How are you going to mitigate that? How will that affect your ability to deliver your services? 

In worst-case scenarios, poor cash flow management leads to stunted growth, employee layoffs, and even insolvency.

Business owners must have a forward-thinking vision both on their profits (financial forecasts) and their cash flow (cash flow forecasts).

Investors Look at Cash Flow

We have worked with some truly incredible founders who have excellent ideas and a real money-making scheme ready to be kicked into motion. And yet, they have no cash flow plans. They have no concept of the hurdles they’ll face and the inevitable inability to move things forward when they hit six months of no income and still have to pay bills. They also have no clue that investors are also looking at cash flow.

An investor looking at a financial forecast will be able to understand the intended scale of profits and viability of a business in theory and based on your assumptions. But an investor will ultimately focus on the cash flow projections and ask:

  • Can the company actually make money based on predicted incomes and outgoings?
  • How long is it before the company runs out of cash and may need to raise more finance?
  • If this company will make money when will that money be made, and when will that money materialise?
  • Is there a buffer for unforeseen issues that impact the plan?

By asking these questions, an investor can figure out; how much money they’d need to invest; when they’d need to invest it; and whether the company has a viable plan that accommodates for months of no foreseeable income.

Create Cash Flow Forecasts

Writing out cash flow forecasts in Excel can take hours, if not days, of your time. Not to mention the additional work to edit your model to accommodate for the various changes to expected bill amounts and due dates, both incoming and outgoing.

Numberslides uses software that simplifies all these models, allowing you to enter data, generate reports, and adjust and amend your information at a very granular level. This gives you and your investors the ability to clearly see both your financial forecasts and cash flow forecasts. It also gives you control and understanding of what’s coming and going in terms of cash, as you grow your business.

Once you have a clear understanding of the difference between your financial forecasts and cash flow forecasts, you can build better pitches, make better business decisions, and give your business the best chance of survival.

Build pitch-ready forecasts now

Tags: cash flow forecasts, financial forecasts


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