Alexis S. Becker
Cash flow forecasting helps owners manage the business
The impact of COVID-19 on businesses has been substantial and it has upturned the notion of “business as usual.” For many business owners, the ability to forecast cash flow has helped them to anticipate potential shortfalls and plan accordingly to cover difficult periods, like the global pandemic, and to anticipate the potential consequences of inflationary impact, staffing shortage, supply chain delays, and weather-related lags.
What is Cash Flow Forecasting?
The term cash flow is exactly as it implies — the flow of money into and out of your business. Cash flow is an indicator of the company’s current health and performance. Managing the day-to-day and strategizing a future outcome are both dependent upon cash flow. Having a better understanding of cash needs and potential spending gaps over a period of time provides prudent guidance for making tactical decisions.
A positive cash flow means that your organization is making more than it is spending. Having a healthy cash flow signifies that the organization has the funds available to meet its financial obligations. It enables the organization to be proactive in short-term and, potentially, medium-term planning.
Though it can be the result of other factors, negative cash flow usually means the organization does not have enough cash to meet its obligations and can be in poor financial health. It could mean that the organization is overspending, misallocating, or experiencing theft or fraud.
By knowing the timing of receivables (money coming in) and what is going out (payables), organizations are better prepared to anticipate future surpluses and shortages for more accurate budgeting. Cash flow forecasting is also an important element in decision-making scenarios — such as the consideration of a facility expansion, changing vendors, or hiring more staff — much easier and feasibly more certain.
Getting Started: An Example of Cash Flow Forecasting
1. Start by determining the time period that best suits your business, such as weekly or monthly. This may depend on how often you bill customers, your payment terms, and how often you pay your company’s invoices.
2. Begin with the cash balance held in the bank and add in anticipated cash receipts from customer payments, draws against your line of credit, cash credits, refunds and other inflows.
3. Subtract payments made for rent, credit cards, utilities, vendor payments and other cash outflows.
4. Your cash inflows should meet or exceed your cash payment requirements. If you foresee a shortfall, consider how you can address it by reducing expenses, pushing for faster customer payments or drawing on your line of credit.
5. Extend your forecast at least two to three months into the future to establish a rolling outlook for the quarter. Update your forecast monthly.
New to cash flow forecasting? You can explore and test the process by assembling a cash flow forecasting model from data collected from a prior financial period. Then, when feeling confident, implement the same process where forecasting is conducted confidently and consistently.
Cash flow forecasting enables you to take a proactive stance and to better understand your future cash needs and potential spending gaps. Using a cash flow forecasting process will allow you to avoid surprises and make better business decisions.
Accounting Automation and Cash Flow Forecasting Tools
When it comes to accounting processes, automation and adoption of the cloud will be key factors for organizations in this decade. Research conducted by Accenture confirmed that while companies were making a deliberate albeit slower move to the cloud over the last decade, the pandemic sped things up.
There are many software programs available to help with cash flow forecasting. Alternatively, you can create a cash flow forecasting spreadsheet using Excel to track and plan cash flow.
Next, consider that one of the most significant benefits of these cash flow forecasting tools is that most are cloud-based, meaning that information is “stored, managed, and processed on a network of remote servers hosted on the internet, rather than on local servers or personal computers.” Cloud-based accounting tools have better reliability, timeliness, and security. They enable organizations to have access to timely information, safely stored in the same location, and provide that same access to accounting teams and approved outside vendors, like accountants. Leadership can tap into the most current financial and operational status from anywhere, at any time, for informed decision-making.
Businesses needed to access all the planning tools in their arsenal during the pandemic. Unfortunately, very few had, let alone knew, how to use these programs.
A Cash Flow Forecasting Solution
In response to the move to more cloud-based solutions, and the desire of clients to have more confidence in leading their organizations, we created MAXIS® by Freed Maxick, a technology-driven, highly automated, and scalable service offering. It is an innovative, high-value service that assists clients in attaining their next level of success.
MAXIS tailors data to deliver more accurate, detailed financial information with which to drive timely business decisions. It can provide financial insights such as industry trends, economic indicators, market considerations, and historical company data to consider when doing cash flow forecasting. In addition to extracting timely data, highlighting anomalies, and providing relevant insights to help forecast cash flow, comprehensive, customized reports assist decision-makers to assess risk and make confident data-driven decisions.
Added Benefits of Cash Flow Forecasting
Cash flow forecasting offers your organization several advantages. It protects your business over the long run by enabling you to avoid making rash decisions. You can make informed business decisions based on the timing of your cash flows and adjust your future working capital needs before you actually need the funds. You can determine what credit terms to offer to customers, based on their payment history. As you identify and address late-paying customers, you can take action to obtain customer payments in a timely manner.
External stakeholders, like banks, might require a forecast to regularly monitor the organization’s financial well-being, particularly if it is providing you a loan. Additional benefits of cash flow forecasting in banking and financing relationships include:
- Obtaining or increasing a line of credit before your business actually needs the funds to support operations.
- Paying down high-interest rate debt or investing excess cash to earn interest through vehicles such as liquid money market or sweep accounts.
- Preserving your company’s good credit standing by reducing or eliminating late payments and overdue bills.
Knowing your current cash flow status ensures you are meeting your financial obligations on time and in full and can yield stronger business relationships in addition to better financial security.
Why are Cash Flow Forecasts Important: Fiscal Endurance
If the last eighteen months have taught us anything, it’s that every business is vulnerable to disruptions. The level of damage these types of interruptions cause can often be minimized with better tools and solid processes. Reliable cash flow forecasting can ensure business continuity as best as possible. MAXIS provides actionable, measurable insights to drive productivity and profitability with accurate, real-time information for sound cash flow management and more faith in the solvency and sustainability of your organization.