Why are short-term and long-term cash flow forecasting important?
Businesses need to prioritize understanding their cash balance, to ensure they are covered financially for both short-term business transactions and how the cash flow affects the long-term financial goals. Your short term cash flow forecast should be based on a budget you have created allowing you to understand if there are any unexpected changes like overspending or delayed payments from suppliers. The long term forecast will help you decide if there are any major changes to the business, like buying a new piece of equipment or expanding your premises.
What are the benefits of short-term cash flow forecasts?
The benefits of short term cash flow forecasts give you a clear picture of how much you have coming in and going out, how much in a given week you need to afford to pay creditors and which customers you need to prioritize for debt collection. You can see any cash gaps and work on a plan to fix them in the short term. It becomes a running schedule for the week or month of priority customer and supplier engagement and payment.
Short term cash flow forecasting gives you the ability to make better business decisions because it enables you to see your financial condition from now on and micromanage changes to keep cash gaps at bay.
Why is Long-term cash flow forecasting so vital to a business?
Long-term cash flow forecasting is typically 3 years in the future. They are less accurate than the short-term and should be used as a guide for how your current cash flow can be compared to.
Long-term forecasts help to ensure the business is heading in the right direction and should be used combined with the short terms to plan for future changes. Decisions made this week can directly impact your long-term goals and financial forecast therefore it’s important to keep the two working in tandem. The long-term forecast will allow you to structure a process around servicing debt as well as understand issues that may constrain liquidity in the future. If the business is facing many threats, they should be highlighted, addressed and remedial plans put in place like reducing costs.
The Pandemic was a great example of how businesses need to be as flexible with both their short-term cash flow and long-term forecast as many small businesses would need to have been as flexible as possible to adjust and recover from multiple lockdowns and reduction of business volumes.
This was especially true in small businesses where having a long-term cash flow forecast and short-term cash flow forecasting is so important to ensure that they could take advantage of opportunities while being flexible enough to act on the unexpected.
Combining both will allow business owners confidence to make decisions around business growth and how to keep their businesses as agile as possible.
Ultimately if the business owner requires investment by implementing the good practice of sound management of both short-term and long-term forecasting an investor will have more confidence in investing in the business.