Your business’ cash flow determines its trajectory. Poor cash flow constricts or halts your company’s growth. It’s important to monitor cash inflows and outflows so that your business remains profitable. One way to achieve this goal effectively is to conduct cash flow forecasting. The latter projects the amount of cash you have and its inflows and outflows into the future. It can be a short-term approach wherein you make a forecast within 60-day periods, medium-term within a fiscal year, or long-term which is a forecast beyond one year.
Why is cash flow forecasting important?
Prevents Cash Shortages
One of the biggest problems of business owners is a cash shortage. They run out of cash to support operations, pay their dues (short and long-term), improve customer service and products, and other aspects of their business. A company may generate revenue but still have cash shortages because of liquidity problems. A forecast of your cash flow allows your team to estimate the inflows and outflows of money. This enables them to identify possible shortages in the future. You can also combine forecasting with managing your current cash flow effectively to avoid this problem.
Maintain Inventory Levels
Low inventory affects your deliveries to customers. A customer that always sees a product is out of stock or frequently receives order cancellations will look elsewhere. Low demand for a product may lead to overstocking. The latter is also a problem because you’ll store unwanted items that consume resources that may eventually spoil or become out of fashion.
Cash flow forecasting is part of the process of efficient inventory management. Your cash flow projections allow you to determine when the best time is to buy new inventory. You’ll need more in-demand items during a seasonal uptick in sales like the holidays. You must have enough resources months before to purchase inventory to meet the demand of your customers. You also don’t want to store items too long because it reduces your cash flow. You might have to offer these products at a discount to liquidate them.
Address Urgent Cash Needs
You’ll need cash to pay for the emergency and urgent needs of your business. These may come in the form of regular salary payments to employees, accidents in the office or business establishment, natural disasters, petty cash use, and others. You’ll need a short-term cash flow forecast to have enough funds for the mentioned situations. With a forecast, you’ll know when to replenish your business’ cash needs and adjust your budget.
Early Warning Sign
Some of the historical numbers you use for forecasting provide you with insights into the trajectory of your business. Your cash flow might be in a downward trend based on past figures. This provides you with an early warning sign about the possible direction of your company if you don’t change course and address the problems causing negative cash flow. It’s possible to redirect your company back into positive cash flow. Your forecast allows you to identify different scenarios and paths you can take to improve your trajectory. Adjust the factors that positively or negatively affect your business into the forecasting model you use. This allows you to conduct tests on best-case and worst-case scenarios. No model is perfect, it might still make mistakes. However, forecasting enables you to estimate your future cash flow.
Plan for Investments
Your business will be unable to realize its full potential without investments. Cash flow forecasting allows you to determine the amount of resources you have in the future. This enables you to plan for investments that push your business further. You’ll be able to balance your budget with regular operations and investments when you have a future cash flow estimate. You’ll know when to set resources aside and for how long, reduce costs, and push for higher sales to generate more revenue for diverse investments.
Pay Dues on Time
Whether you’re paying short or long-term dues, a cash flow forecast enables you to create and follow a budget for your business. Budgeting allows you to set cash aside for salaries, utilities payments, taxes, payments for creditors and/or suppliers, and other payables. Paying on time allows your business to avoid penalties and additional fees that you might incur because of overdue payments. A cash flow forecast enables you to schedule payments and pay them automatically without jeopardizing your cash flow.
Businesses want to reduce their exposure to risks that could prevent them from reaching their goals and stunt their growth. It’s impossible to eliminate risks, but you can manage them. Cash flow forecasting gives you insights into the possible risks your company might encounter because of poor cash flow in the future. The forecast provides you with enough time to avoid risks or reduce their effects. It also allows you to manage your cash flow so that it stays positive. You’ll know where to direct your resources and where to cut back on spending.
Create a Plan
A cash flow forecast is an important part of your business plans. It provides you with an estimate of your cash flow which you’ll use for operations, campaigns, and whenever you implement strategies. The estimate your forecast generates may change depending on how you handle your resources. However, it allows you to create a plan your team can follow so that you can achieve your objectives.
A cash flow forecast is a practice you should implement regardless of the size of your business. The projection it generates allows you to determine the trend of cash inflows and outflows. The insights you gain enable you to change your strategies and improve your cash flow. Positive cash flow provides you with financial flexibility and more growth opportunities.If you need assistance with updating your books which you’ll use for making a forecast, we at Robookkeeper can be your business partner. We have a team of experienced virtual bookkeepers that can review, rectify mistakes, and update your accounting books using cloud-based software. We offer first-rate virtual bookkeeping services. The cloud-based software we use allows you to access your updated accounting books remotely. Access and review them at your convenience to make forecasts, create a budget, assess your financial situation, and others.