Nobody ever wants their business to fail. It is also impossible to predict the future with 100% accuracy. Having a cash flow forecast can be a tool that will help you to prepare for many different scenarios that can occur in the future.
To put it simply, cash flow forecasting involves estimating how much cash will be coming into and out of your business during a certain period and gives you a clearer picture of your business’s financial health.
What is a Cash Flow Forecast?
Cash flow forecasting is the process of estimating how much cash you will have and ensuring you have enough to meet your obligations. By focusing on the expenses, you need to pay and the revenue you expect to generate, cash flow forecasting can help you manage your working capital and plan for different positive or challenging scenarios.
A forecast comprises three key elements: beginning cash balance, cash outflows (e.g., expenses for utilities, rent, loan payments, payroll), and cash inflows (e.g., cash sales, receivables collections).
Building Out Different Scenario Models
It’s always good to create best-case, worst-case, and just ok financial scenarios. With cash flow forecasting, you’ll be able to see the impact of these scenarios and implement the right course of action. You can use different models to predict what needs to happen, especially during uncertain and difficult times.
In situations where variables shift quickly, such as during a recession, reviewing and updating your forecasts regularly on a weekly or monthly basis is highly recommended. By monitoring your forecast closely, you will be able to identify warning signs such as increasing expenses or declining revenue.
How to Improve the Accuracy of Your Cash Flow Forecast
In cash flow forecasting, historical data is what determines your data. This means that making sure historical data is accurate is critical. Below are some tips for ensuring its accuracy:
- At the end of each week or month, input your actual results of the cash that was spent and cash received. This will allow you to identify what items you got wrong in the estimates and evaluate why you got it wrong. This analysis may lead you to identify more significant issues and help you make the correct adjustments to your assumptions.
- Carefully evaluate all of your assumptions. Be aware that just because it’s correct now does it mean that it will still be right in the future. Make sure you go through everything, especially when it comes to sales, and validate it.
- Don’t forget to include loan payments, annual payments, credit card debt payments, outstanding bills, and estimated taxes.
- It’s almost impossible to be able to forecast where your business is going to be any more than one year out. By trying to do this you will introduce more significant uncertainty and risk the further out your financial scenario models go.
Get Expert Help With Cash Flow Forecasting
Whether your business is fighting for survival, growth, or just wanting to run your business better, getting a cash flow forecast can help you make the right business-critical decisions that can impact your business’s financial health.
To get expert assistance with your future cash flow, chat with our team. Join the Conversation…