Running a business without understanding your cash flow is like driving a car blindfolded - you have no idea what's around the corner, and a crash could happen at any moment. For many SMEs in Singapore, cash flow forecasting is an often overlooked but crucial tool that can mean the difference between success and failure. Unfortunately, many SME owners focus too much on balance sheet and income statement, both of which are important but are historical information. Here are the 5 biggest cash flow forecasting mistakes we have seen our SME clients make. Our goal is to empower you to take control of your business’s financial future using straightforward and scalable methods that you can grow with your business.
Mistake #1: Treating Cash Flow Forecasting as an Afterthought
Many SMEs treat cash flow forecasting as an afterthought, something they’ll get to “when they have time.” This reactive approach often leads to financial surprises, as they’re always playing catch-up. By the time we realize there’s a cash flow problem, it’s already too late. Think of cash flow forecasting like brushing your teeth. You don’t skip it just because you’re busy; you do it twice daily because you know it’s essential for your oral health. Similarly, regular cash flow forecasting is essential for the financial health of your business.
Solution: Make cash flow forecasting a non-negotiable part of your business routine, just like paying your bills or managing payroll. Dedicate a set time and day every week to review and update your forecast. I find that putting this into my calendar forces me to set aside time for this rather than finding excuses of being busy. This helps me to stay ahead of any potential cash flow issues and gives me time to find solutions before it blows up.
Mistake #2: Overly Optimistic Revenue Projections
As a business owner myself, we can sometimes be overly optimistic about our revenue projections – it’s completely normal, after all, this is what keeps us going when the things gets tough. We often assume and hope that sales will always go up and customers will always pay on time. But reality often paints a different picture. If you are planning for a picnic, you wouldn’t assume it’s going to be sunny just because it was sunny yesterday. You’d check the weather forecast and pack an umbrella just in case. Your cash flow forecast needs that “umbrella”- a cushion for unexpected shortfalls.
Solution: When forecasting, always use conservative estimates for your revenue. Base your projections on past data and factor in possible delays in payments or a drop in sales. This will give us a more realistic picture of our cash flow and help us prepare for leaner months.
Mistake #3: Focusing Only on Profits, Not Cash Flow
Many SMEs focus solely on profitability and ignore cash flow. Profitability is like a healthy diet, and cash flow is like exercise. Just because you’re eating healthy doesn’t mean you’re getting enough exercise. You need both to stay financially fit. When we see a healthy profit, we assume everything is fine, not realizing that profits don’t necessarily translate into cash in the bank. You can be profitable on paper but still struggle to pay your bills if your cash flow isn’t managed properly. In fact, 82% of businesses fail due to cash flow issues and many of them are profitable.
Solution: Always create a cash flow forecast in addition to your profit and loss statement. This way, you can clearly see the timing of cash inflows and outflows. Track when you’re actually receiving payments from customers and when you’re paying out expenses to ensure you have enough cash on hand.
Mistake #4: Not Accounting for Payment Terms and Delays
It’s easy to forecast based on the assumption that customers will pay on time and suppliers will get paid as soon as you receive an invoice. But the reality is often different. Customers may delay payments, and you may negotiate longer terms with suppliers to manage cash flow, which can throw off your forecast. You can’t actually count on the payment from your clients until it’s in your hands right?
Solution: When creating your cash flow forecast, include realistic payment terms based on historical data. If your customers typically pay 30 days after the invoice due date, factor that into your forecast. Similarly, if you have negotiated 60-day payment terms with your suppliers, account for this in your outflow to get realistic payment timeline.
Mistake #5: Not Planning for Different Scenarios
Many businesses only create one cash flow forecast based on their best guess of the future. But what if things don’t go as planned? What if your biggest client suddenly leaves, or your suppliers increase their prices? Without a plan for these scenarios, you’re left scrambling to react.
Solution: Prepare at least three versions of your cash flow forecast: best case, worst case, and most likely case. This will help you visualize different outcomes and prepare for each one. This is like how the military always prepares a plan for different scenarios, so in times of war, soldiers know exactly what to know when that scenario happens and not get caught off guard.
You don’t need fancy software to manage your cash flow effectively. A basic excel spreadsheet can work wonders, and as your business grows, you can upgrade to more sophisticated tools. The important thing is to get started now. Even if it’s not accurate to the dollar or cent, it really doesn’t matter as long as you get started. Missing tens of dollars is better than getting caught blindsided with a big shortfall. Get started today!