80% of Businesses Fail Due To a Lack of Cash. Here are 4 Reasons Why Cash Flow Forecasting Is So Important - ForwardAI (2024)

Cashflow forecasting helps businesses predict when issues may arise and allows them to take action proactively to avoid cash flow gaps.

You might have heard that the biggest cause of business failures iscash flow issues, but to what extent is the severity of this widespread problem? To put things into perspective, more than80%of business failures are due to a lack of cash,20%of small businesses fail within a year, and half fail within five years.

But it doesn’t have to be that way. In fact, many businesses can avoid cash flow problems with propercash flow forecasting. Cashflow forecasting helps businesses predict when issues may arise and allows them to take action proactively to avoid cash flow gaps.

That said, many businesses already operate at max bandwidth, and cash flow forecasting isn’t on business owners’ minds. It’s usually already too late when business owners are hit with a financial setback and realize they don’t have enough cash to cover it.

Many business owners don’t realize that thescope of benefitsthat derives from good cash flow forecasting goes light years beyond helping the business plan its operation. If you are still thinking about why you should bother with it, here are a few reasons why you should do cash flow forecasting:

1. It helps businesses avoid cash flow gaps

This is the most straightforward and important reason why cash flow forecasting is crucial.

Here’s a scenario for you: John’s client promised thepaymentwould be deposited by today, but there has been a mix-up, and the bank said John wouldn’t get the money until next week. John is expected to pay his vendors tomorrow, but without receiving the payment from his client, he doesn’t have enough money to pay. The cycle continues.

This is the reason manybusinesses fail.

A cash flow forecast helps businesses avoid this very situation. They can use a forecast to project best-case scenarios, worst-case scenarios and everything in between. They can then use that to make prudent decisions about how much money to spend, where to put it, and when to spend it.

If they think there’s a chance cash may not come in the door, the business could decide to put off a big purchase. Or they could talk to vendors and get an extension on payables. Or they could offer customers a discount to pay their bills early. The forecast gives the business the knowledge they need to take action and avoid difficult cash flow situations.

2. It helps secure loans

Loansare an important part of running any business. Financing can help a business expand, improve its products and workflows, or cover operational costs in a crunch.

However, obtaining financing is easier said than done, especially for businesses with little assets or no credit history. In this case, lenders look at profitability, expenses and cash flow.

A strong cash flow forecast helps a business prove its creditworthiness to lenders. A business can use its cash flow forecast to show that it deservesa loanand is a good credit risk. Or, if your cash flow forecasting shows otherwise, maybe it’s a good time for you to assess internally and improve your cash flow position before going to a lender for a loan.

3. It helps businesses make better decisions

A cash flow forecast gives a business a glimpse into the future. It helps them view when cash is coming in and going out, so they can better plan for the future and make strategic decisions that align with their budgets.

Let’s say a business is considering hiring additional staff or purchasing new equipment. A business might look into how much money they have right now, thinking they could cover the extra expense. But what if the business lost a major client a week from now? Or what if sales suddenly plummeted due to competition?

These are the kind of things that your account balance can’t tell you and are the exact reasons businesses need cash flow forecasting. By understanding their future cash availability, businesses can makeinformed decisionsabout when and how to invest in their growth.

4. It helps businesses set measurable goals

Leveraging cash flow forecasts can help businesses set measurable goals to improve cash flow tangibly and determine the path to better business outcomes.

If a best-case scenario forecast says you can potentially grow your business revenue by 50% by improving your operation with a new equipment purchase, you now have a benchmark number.

Or, if you plan onreducing expensesby 20% by cutting out parts of your business operation, cash flow forecasts can help you see the business and revenue impact of cutting out a project and if the financial cost reduction is in line with your decision. You can now set data-driven business goals, know what outcome to expect, and measure success.

That’s two drastically different examples, but no matter what situation your business is in, cash flow forecasting can help a company set measurable goals.

Forecasting for your business is easier than you think

Here’s the thing about cash flow forecasting: It’s not new, but it used to be a challenging, labor-intensive, and time-consuming job that business owners would task their accountants with. The good news is that innovating technology makes cash flow forecasting easier than ever before. New tools now directly integrate with many cloud-accounting platforms that businesses use, making cash flow forecasting faster, more accurate, and sometimes even for free. Start looking for a solution that works with your accounting platform today, and see the wonders it can do for your business.

80% of Businesses Fail Due To a Lack of Cash. Here are 4 Reasons Why Cash Flow Forecasting Is So Important - ForwardAI (2024)


Why do 80% of businesses fail? ›

Money, or tangentially, cash flow problems. More than 8 in 10 businesses admit to experiencing cash flow problems at some point during their operations. To sum it all up, a study revealed that 82% of businesses fail because of cash flow mismanagement.

Do 82% of businesses that fail because of cash flow problems? ›

According to SCORE, 82% of small businesses fail due to cash flow problems. Cash flow is a blanket term that has many underlying roots. Cash flow is simply a metric that indicates how money is coming in and being spent at your business.

Are 82% of business failures due to poor cash management? ›

Cash flow measures the ability of the company to pay its bills. The cash balance is the cash received minus the cash paid out during the time period. This is where things can get tricky with cash flow management. According to a U.S. Bank study, 82 percent of business failures are due to poor cash management.

Why is it important to have a cash flow forecast? ›

Overall, cash flow forecasting is essential for maintaining financial stability and making informed decisions. There is a common misconception that cash flows are only for addressing financial issues, but the reality is that it can be a critical tool for assessing growth opportunities or diversification.

What are the top 10 reasons why businesses fail? ›

And once you identify these harbingers of failure, you can increase your own chance of success.
  • Procrastination. ...
  • Inadequate knowledge of regulations. ...
  • Ignoring the competition. ...
  • Ineffective marketing and ignoring customers' needs. ...
  • Incompetent employees and management. ...
  • Lack of versatility. ...
  • Poor location. ...
  • Cash flow problems.

Why do 70% of businesses fail? ›

According to business owners, reasons for failure include money running out, being in the wrong market, a lack of research, bad partnerships, ineffective marketing, and not being an expert in the industry. Ways to avoid failing include setting goals, accurate research, loving the work, and not quitting.

How does poor cash flow affect a business? ›

Poor cash flow management can lead to delayed vendor payments, missed growth opportunities, increased debt, and reduced employee morale. To address these challenges, businesses must identify cash flow issues early, implement strategies to improve cash flow, and utilize the right tools and resources.

How does lack of cash flow affect a business? ›

A sustained period of negative cash flow can make it increasingly hard to pay your bills and cover other expenses. This is because your cash flow affects the amount of money available to fund your business' day-to-day operations, otherwise known as working capital.

How can cash flow impact business failure? ›

A cash flow problem occurs when the amount of money flowing out of the company outweighs the cash coming in. This causes a lack of liquidity, which can inhibit your ability to make payments to suppliers, repay loans, pay your bills and run the business effectively.

What is a major reason why businesses fail financially? ›

The most common reasons small businesses fail include a lack of capital or funding, retaining an inadequate management team, a faulty infrastructure or business model, and unsuccessful marketing initiatives.

Why is too much cash bad for a business? ›

More often than not, a cash-rich company runs the risk of being careless. The company may fall prey to sloppy habits, including inadequate control of spending and an unwillingness to continually prune growing expenses. Large cash holdings also remove some of the pressure on management to perform.

Why do some businesses have poor cash flow? ›

You see, the majority of small business cash flow problems are caused by late payment of money owed. By taking some simple action to reduce the risk of your invoices being paid late, your cash flow worries will be significantly fewer and you can enjoy a good night's sleep again!

What are the 4 key uses for a cash flow forecast? ›

Planning for the future, assessing future performance, predicting future goal accomplishments, and identifying cash shortages are the uses of a cash flow forecast.

How to improve cash flow in a business? ›

6 ways to improve cash flow in your business
  1. Use software to track your inflows and outflows. ...
  2. Send invoices out immediately. ...
  3. Offer various payment options for customers. ...
  4. Reduce operating costs. ...
  5. Encourage early payments, while discouraging late payments. ...
  6. Experiment with your prices.

What are the most common causes of cash flow problems? ›

5 Biggest Causes of Cash Flow Problems
  • Avoiding Emergency Funds. Businesses — like individuals — need to be prepared for the unexpected. ...
  • Not Creating a Budget. ...
  • Receiving Late Customer Payments. ...
  • Uncontrolled Growth. ...
  • Not Paying Yourself a Salary.
May 3, 2023

Is it true that 90% of businesses fail? ›

Key findings. 23.2% of private sector businesses in the U.S. fail within the first year. After five years, 48.0% have faltered. After 10 years, 65.3% of businesses have closed.

Why do 90% of startups fail? ›

Top Reasons Startups Fail

The relatively high startup failure rates are due to various reasons, with the most significant being the absence of a product-market fit, poor marketing strategy formulation and implementation, and cash flow problems.

What is the #1 reason why businesses fail Why? ›

The most common reasons small businesses fail include a lack of capital or funding, retaining an inadequate management team, a faulty infrastructure or business model, and unsuccessful marketing initiatives.

Why do 95% of businesses fail? ›

The causes of failure are numerous, from a faulty business model and poor product-market fit to running out of cash or a lack of passion and perseverance. However, one of the most critical and overlooked reasons startups fail comes down to poor hiring and talent acquisition practices.

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