If there’s one thing that all small and medium-sized enterprises (SMEs) should prioritise, it’s their cash flow. Generating a positive cash flow allows SMEs to keep the lights on, pay staff and suppliers, navigate turbulent economic waters, and take advantage of potential growth opportunities. However, having a negative cash flow will curtail all aspects of your operations.
Unfortunately, many SME owners feel at the mercy of their cash flow—rather than the other way around. They struggle to predict when cash flow might dry up. Lean periods come as a shock, catching SMEs by surprise.
This is where cash flow forecasting comes in. By creating forward-thinking cash flow forecasts, SMEs can peek into the future—identifying potential hurdles around the corner and allowing them to plan accordingly (e.g. by putting away extra savings ahead of time).
Cash flow forecasting has arguably never been more important. Record-high costs have left many SME owners worrying about whether they’ll even be able to make it through the winter, meaning businesses need to have a firm grasp over their finances.
Let’s examine 10 common cash flow hurdles that SMEs face before explaining how to overcome them by implementing advanced cash flow forecasting software.
1. Time
There’s only one commodity that you’ll never get back: time. SME owners know this all too well. They’ve always got 1,001 things to attend to, and it seems like there’s never enough time in the day. From generating new leads, to providing stellar customer service, to hiring new staff, SME owners are always up against the clock.
This perennial time pressure has a profound impact on entrepreneurs. Indeed, research examining Swedish SME founders states that “... time pressure is a factor reducing positive emotions and amplifying negative emotions, such that it has a negative relationship to emotional wellbeing.”
Time-pressured SME owners/employees might therefore believe they simply don’t have the time to conduct cash flow forecasts—especially as they’re not accountants. Manual cash flow forecasting methods are incredibly time-intensive. SMEs have to find their company’s extensive financial data (which is often spread in multiple systems), manually plug it into spreadsheets, and then wade through the results. This is valuable time that SMEs could otherwise spend on growing their business.
2. Resources
Small-scale teams usually lack their own finance team. They don’t have the luxury of outsourcing cash flow forecasting to another department, while some might not even have their own accounting firm.
Therefore, you might lack the internal resources to conduct cash flow forecasts. Nobody on your team is an accountant, and even if they were, they’ve barely got a spare moment to breathe—let alone trawl through your business’s historical financial data.
The obvious solution would be to hire an accountant. However, with inflation reaching a 40-year high, SME owners are grappling with fewer resources than they’re used to. They’re currently trying to tighten the purse strings rather than looking to spend more on professional services.
3. Other priorities
SMEs are often ‘all-hands-on-deck’-type workplaces. However, despite these types of go-getter attitudes, prioritisation is a must. Teams can’t do everything they need to—to-do lists are rarely, if ever, completed. Such is life, such is business.
Unfortunately, however, this means tradeoffs. SMEs must focus on the most pressing issues at that moment in time—even if they end up sidelining tasks that could prove invaluable in the coming months.
Should they prioritise manually creating a cash flow forecast from scratch or responding to a customer complaint? Probably the latter.
Is it more valuable to conduct a cash flow forecast or unload a new inventory delivery? Again, likely the latter.
There are tons of similar examples we could use. However, the takeaway is simple: cash flow forecasting might be useful, but it’s rarely the number one priority.
4. They don’t understand the benefits
This is closely linked to the previous point. SMEs often fall into the trap of believing that cash flow is tomorrow’s concern. They’re busy with other things, so they don't see why they should waste precious time today worrying about what may happen tomorrow.
Adopting such an attitude is a catastrophic mistake. By getting a firm grip over their cash flow, SMEs can fuel future success. They can identify opportunities to grow, realise when finances might be tight, and plan accordingly. They’ll run a predicted business and avoid nasty surprises—whether shock tax bills or lacking the finance needed to keep the lights on when a customer pays late.
5. Ineffective methods
Many SME owners are hindered by their lack of accounting knowledge. They resort to age-old methods without realising that these are quickly being replaced by more agile, flexible, accurate, and actionable alternatives.
Google ‘how to calculate cash flow’, and you'll come across thousands of hits describing how to use Excel-based templates. This has long been standard practice in accounting, so it must be the best method. Right?
Not exactly.
Excel-based forecasting methods are quickly becoming outdated—we’ll explain this in more detail below. Unfortunately, many SMEs are unaware that this age-old method is overly time-consuming and inaccurate. Those that do recognise the value of cash flow forecasting are unintentionally hampered by the methods they use.
6. Static (and inflexible) predictions
Excel-based templates generate static, one-time predictions. You manually plug in your company’s historical financial data and it creates a cash flow prediction for that exact moment in time.
But what happens when something changes within your business? For example, if a customer suddenly pays an overdue bill or you spend thousands of pounds on new equipment? The forecast is now out-of-date—meaning it’s no longer correct.
Traditional Excel-based cash flow forecasting methods are also overly inflexible. You have no way to change the predictions based on whether a supplier pays you late, or to account for the impact of seasonality on your business. This makes it near-impossible to conduct accurate scenario modelling, limiting the value that these predictions offer.
7. Incomplete datasets
Excel-based templates aren’t just static—they also rely on incomplete datasets. For example, they don’t account for journal movements, which significantly skews predictions.
Think about it: you wouldn’t take your car for an MOT if the garage said they’ll analyse everything except the brake pedals. If your GP offered a check-up but didn’t even take your pulse, then you’d think they should be struck off.
Cash flow forecasts must be all-encompassing, rigorously analysing every single piece of your company’s financial data. Therefore, working with incomplete datasets is a massive no-no.
8. Inaccurate (or misleading) results
Analysing a portion of your financial data will certainly reveal some useful titbits, but this approach is far from reliable. Incomplete datasets lead to inaccurate results: fact.
What’s more, most cash flow forecast templates fail to provide updated tax calculations (i.e. how much tax you currently owe). This is a major downfall. With taxes one of SMEs’ largest expenses, it’s vital that they plan ahead to ensure they have enough cash in the bank when the taxman comes knocking.
This is where traditional forecasts fall short. They fail to provide updated tax estimates, which may lead SMEs to spend money they’ve set aside on growing their business—instead of on their upcoming tax bill.
9. Errors
Manually entering data into spreadsheets is an error-stewn process. Ever made a typo? Of course you have! Except, an accidental mistake can throw cash flow forecasts entirely out of whack, meaning you gain wildly inaccurate cash flow predictions.
As William McClelland, Managing Director of Euro Hostel, states, “Prior to moving to Xero and Futrli, I was using Excel spreadsheets. They weren’t reliable and would crash, add daft little formulas here or there… When I was presenting to the Board, my cash flows were wrong, and all sorts of nonsense came out in the figures. It was an absolute nightmare! Excel is a brilliant bit of software and it’s great for what it does but when you get to a certain size, obviously it can’t cope.”
10. Not using Futrli
Here at Futrli, we take a different approach to cash flow forecasting. Our platform utilises an advanced algorithm to offer detailed cash flow predictions, showing you how much cash you’ll have in the bank at any moment throughout the next 36 months.
Connect directly with your accounting software to automatically analyse every single financial data point from the last two years. No more manual data-entry means you have more time to focus on other matters, while also eliminating the likelihood that errors will creep in. Gain complete predictions for the next three years in just seconds.
What’s more, we go beyond the numbers. Click on each prediction to see our rationale (i.e., why we came up with that figure). Play around with your numbers, conduct financial dry runs to see the impact of any major decision. How would hiring a new employee impact your cash flow for the year? What would happen if you lose your largest customer?
Go beyond static, inaccurate, inflexible cash flow forecasts. Gain rapid insights that spell out your business’s financial future and run a predicted business. With Futrli, you’ll have your very own financial crystal ball. Identify challenges ahead of time, make the necessary plans, and wave goodbye to nasty surprises.