The Advantages of Cash Flow Forecasting

Many business owners overlook the importance of managing their cash flow and creating cash flow forecasts. While it adds an extra step to your accounting routine, there are many advantages of cash flow forecasting. In fact, many would argue that cash flow forecasts are an essential part of running a business. Without them, you could quickly find yourself running out of cash.

Let’s take a closer look at what a cash flow forecast is, its benefits and how to create one.

A cash flow forecast estimates the cash coming into and going out of a business over a specified period of time.

It’s not uncommon for businesses to experience cash shortages from time to time. Even when sales are doing well, some customers may pay after goods or services are delivered. Because their payments are delayed, businesses may find themselves facing cash shortages.

One of the advantages of cash flow forecasting is that business owners can predict when they will run out of cash (based on past performance and sales history) so that they may plan ahead and take action now.

There are other benefits of cash flow in planning and forecasting, too.

There are many advantages of cash flow forecasting for businesses of all sizes. After all, cash flow is a key indicator of a business’s financial health. Estimating or forecasting its trajectory will help a business weigh its performance and make critical changes as needed to keep cash flow in the positive.

Let’s look at some of the key benefits of cash flow forecasts.

Benefits Of Cash Flow Forecast for A Business

Plan for Cash Shortages

One great advantage of creating cash flow forecasts is that they allow a business to plan for cash flow shortages.

Let’s say that your business delivers $75,000 worth of products to customers in May with invoices that are due in 30 days. On paper, your business will have $75,000 in revenues for the month. However, that cash won’t land in your bank account until June. The business appears healthy, but its sales are stuck in accounts receivable. Unless you have cash on hand, you’ll have trouble covering your expenses until those funds arrive in your account.

If your business had engaged in cash flow forecasting, you could have predicted this scenario and taken steps earlier in the year to ensure you had cash on hand to cover your expenses.

Cash flow forecasts only focus on the revenue you anticipate collecting and the expenses you’ll actually pay during the period.

Plan for a Cash Surplus

Just as a cash flow forecast can help you plan for a cash flow shortage, it can also help you properly allocate cash surplus.

Having stagnant cash on hand does little to help your business grow and thrive. However, putting your excess cash to work can help you create a competitive advantage and reach your long-term goals for your business.

Answer “What if” Questions

Another great advantage of creating a cash flow forecast is that it can help you answer “what if” questions that will impact your cash flow.

Let’s say that you want to hire a new employee. With cash flow forecasting, you can see how the costs of hiring will affect your cash flow and whether you can truly afford to hire someone.

You can take this same approach for any major decision that you want to make, including:

• Expanding
• Investing in new equipment
• Making a new business investment

Cash flow forecasting empowers you to make informed business decisions.

It Keeps Employees and Suppliers Happy

Cash flow forecasting helps you avoid cash flow shortages, which means that your business will continue to pay suppliers and employees on time.

Proper cash flow planning helps ensure that you maintain healthy and positive relationships with your staff and those who you work with.

You know the benefits of cash flow forecasting, but how do you create one? There are several steps that you’ll need to follow.

Determine Your Forecasting Period

The first step is to determine your forecasting period. Then, you can create cash flow forecasts for a few weeks or even several months.

Aim to plan ahead as far as you can while still remaining accurate. A well-established business will have a long history of data they can use to create longer forecasts. Newer businesses won’t have a large amount of data, so it will be more difficult to create accurate predictions and forecasts.

It’s okay if your business can’t plan too far ahead. Over time, your forecasts will change.

List Your income

Once you’ve determined your forecasting period, the next step is to list your cash inflows, or income.

You’ll want to list your income for each week or month in your cash flow. Remember to consider all sources of cash inflows, including investments, royalties, grants, etc.

List Your Expenses

Once you have all of your cash inflows listed, you can list your expenses. For each week or month of the forecast, list all of the cash your business will be spending on:

• Salaries
• Materials
• Rent
• Assets
• Marketing
• Taxes and payroll
• Bank loans

Like with your cash inflows, you want to make sure that you’re listing all of your expenses so that you have an accurate forecast.

Calculate Your Running Cash Flow

Now that you have a list of your cash inflows and outflows, it’s time to start calculating your running cash flow.

For each week or month of your forecasting period, subtract your expenses from your income. This will help you determine whether your cash flow is negative or positive.

Over time, you can adjust your forecast to keep it accurate and up to date. However, forecasts naturally change over time, so it’s important to continue updating it as time goes on.

Creating a cash flow forecast manually can be tedious and time-consuming. Automation can streamline your forecasting, saving you time and reducing the risk of errors.

When you create forecasts manually, you have to go through bank statements, financial statements and other documents to gather all of your income and expenses. It can be a lengthy process, and if you miss an item or two, it can throw off your entire forecast.

Automation eliminates these steps to save you a great deal of time while reducing the risk of costly errors. Simply connect your forecasting software to your accounting software to start generating forecasts using accurate and up-to-date data.

All of the time you save automating your forecasting will allow you to focus on more important things, like running your business.

Looking for an easy way to automate your cash flow forecasting? Cash Flow Frog automatically syncs with your accounting software to gather accurate, up-to-date data for your forecasts.

Cash Flow Frog integrates with QuickBooks, Xero and FreshBooks, making it easy to generate forecasts automatically.

Along with forecasts, you can also create what-if scenarios, view your best and worst customers, track your actual vs. planned results and more. Cash Flow Frog makes it easy to manage and forecast your cash flow from one centralized platform.