Cash flow is calculated as the total amount of cash that moves in and out of your business. It is an integral part of any business and so, it is necessary to have control over cash flows for better performance of the business. Understanding your business’ cash flow system will help you to make informed plans about the growth of your business. What Is Cash Flow Forecasting? In this blog post, you can read more about:
What is cash flow forecasting?
What to include in the cash flow forecast?
The need for a cash flow forecasting in your business
Benefits of cash flow forecasting
Cash flow forecasting is a method where you document an estimate of the financial transactions of your business. It can be implemented to have an outlook on the current and future financial situation of your business. It can project on your future income and expenses. This forecasting can be helpful in making informed decisions on different sectors of your business keeping the estimated status of financial aspect in mind.
Cash flow forecasts can be prepared for both short and long duration. Short duration ranges from weeks to months whereas, long duration forecasts are typically prepared for a year.
What To Include In The Cash Flow Forecast?
While preparing cash flow forecasts, there are three key elements to be considered. Projection on these three key elements should be taken seriously while creating a forecast. They are:
- Likely sales
- Payment schedules
- Likely costs
Likely Sales Projection
Likely sales are the sales that you are expecting in the future. When including the estimate of likely sales, you can rely on different existing and known parameters. If you have an established business, you can look for the previous sales pattern to have an estimate on future sales. Seasonal patterns, promotional factors, and new product launches can also help in deciding the estimates on both revenue and expenses.
If you're starting a new business, you can look for data from the competitors, market experts, and surveys to predict the estimates. This will give you an idea about the expected revenue from different sources and also an estimate on your company’s expenses.
Good knowledge about market trends is essential to make more accurate predictions. There again you need to consider the influence seasons and other factors in the market and create an estimate accordingly.
Payment Schedule Projection
Once you are aware of your sources of income and channels of expenses, it is necessary to have an idea of the payment schedule. An income from your customer can sometimes be delayed for a few weeks to months depending on the quality of the customer and the agreement you have with them. It is advised to record the invoices and note down the estimate of payment duration for a better forecast model.
Likely Costs Projection
Likely costs include cash flows that are fixed on both amount and time. Expenses such as rent, salary, etc come under this and remain constant for the future. Other sources, which are variable in nature, can include the expenses on raw materials, stock or other requirements. These expenses depend on the sales and current requirements depending on the market.
You can make use of different sources to create a more accurate cash flow forecasting. Three of the major sources that can help you here are:
- Financial records
- Bank transaction documents
The main source for examining your actual cash flows are through your existing financial records. The balance sheet, bills, invoices, and so on can contribute to making an organized cash flow record. Doing this manually consumes a lot of time and energy. With the help of any accounting software like QuickBooks or Xero, you can make this task easy and quick. Having a digital copy of your financial records will make it easier to integrate it into different platforms.
The accounting software you are using can help you map the accounts receivable and accounts payable of your business. This is a rather easy step where you can integrate the document from the accounting software you are using to the forecast model.
You bank transaction documents also help to track down the transactions from your business account. Bank statements received electronically can be directly integrated into the forecast model.
People involved in different sections of the business are excellent resources when it comes to forecasting. The knowledge of previous trends at the collection end of payment practices from different customers is an important input when it comes to cash flow forecasting. Integrating an estimate from their respective departments into the forecasting software will add to the efficiency of the forecast. For this, you need to make people in different sectors of your business be aware of the importance of forecasting.
Why Do You Need Cash Flow Forecasting For Your Business?
Cash flow forecasting is created for a better understanding of the financial status of a business. It also helps in assessing the growth of the business. The goals of this forecasting focus on keeping track of:
- Cash balances of the business
- Performance of the business
- Achieving targets
Keeping track of all the above aspects reduce the risk of business going into a cash crunch. Lack of management in foreseeing of a cash crunch is not a good excuse to have in business. Therefore, having the outcome aligned with the forecast model helps you understand when the shortcomings arise and better manage those shortfalls before they reach the edge.
Benefits Of Cash Flow Forecasting
It all comes down to the following benefits a cash flow forecast model can help you within your business.
- Avoiding Cash Shortage: A simple cash flow forecast will assist you to avoid cash crunches in the future. If you forecast cash flow in advance you will be in a better position to negotiate better loan rates, manage supplier’s expectations and tighten your credit control.
- Use Cash Surplus For Growth: For the growth of the business, it is imperative to take advantage of available cash surplus. With cash in your account, you can plan towards the growth of your business services. Cash flow forecasting allows you to decide how much more can be invested in the business and when.
- Achieve Confidence In Financial Systems: Cash flow forecasting will help you identify the areas where you need to cut down your expenses, cut down operating costs, hire new staff members to carry out business activities and to tighten payment terms. Regular cash flow forecasting is an essential element of any business to make you understand the cash flow situation before you reach a crisis situation.
In addition, having a detailed cash flow forecast plan helps in presenting your business plan to stakeholders and potential investors. Awareness of your future cash flow shows the disciplined financial practices of your business.
In conclusion, A cash flow forecast model helps you with estimating the cash flow of your company. However, an unpredictable cash shortage can hold back your company from achieving many goals. In such situations, you can reach out to avail funding using your accounts receivable. Finaxar is a financial institution that provides quick funding through invoice factoring and receivable financing.