Cash Flow Forecasting Tips for Your Business
Every entrepreneur focusing on growth appreciates the need for maintaining a steady cash flow. Although a profitable company may be the ultimate end goal, without good cash flow management and planning, having a profit on paper means little.
The challenge is that sometimes you cannot tell how much you expect your business to make over a given period or how much you will spend over the same duration. This makes strategic investment decisions quite tricky but also highlights why cash management can often be more important for business success than even revenue and monthly financials.
Ensuring you have enough money to run your business is critical to survival. Effective cash flow forecasting helps business leaders make faster and more informed decisions through short-term and long-term business planning.
Free resource: cash flow template
Follow our helpful tips on projecting your firm's cash flow successfully.
Consider Cash Inflows and Outflows
It is difficult to forecast your entity's cash flow without first identifying the sources of income and the expenses you will likely incur. For this reason, cash flow forecasts rely heavily on an accurate understanding of the amount of money the company receives (inflows) from its core business along with any expenses (outflows).
A good place to start is reviewing previous sales. This will help establish the revenue sources for your enterprise. However, don't forget to include such macroeconomic factors as consumer confidence when making cash flow projections since it bears a direct impact on the operations of your firm. Price changes, the launch of new products, and recalls can also affect business inflows and outflows in one way or another.
When you forecast outflows, include both fixed and variable costs while making a distinction between the two. Staff training expenses, bonuses, and equipment acquisition costs are some of the outflows you should include in cash flow projections to get accurate results.
Prioritize Effective Communication
One of the reasons why some companies experience a liquidity crisis is as a result of failing to involve key in-house decision-makers. If each department head has its own process for collecting and predicting cash flow or budgets, it only leads to problems. It also leaves key insights on the table.
By gathering important data points and valuable insights from across the organization, you'll not only enhance forecasting accuracy but also help shed light on what is driving the numbers.
Moreover, keeping department or other managers apprised of cash flow projections will allow them to effectively budget and plan investments, and also report on progress.
Develop Potential Scenarios
As you make your cash flow projections, it may be helpful to develop several potential scenarios and possible future changes that may affect your business.
For instance, there may be a pending government regulation that is awaiting approval which will directly impact your future operations. Creating one cash flow scenario with the regulations being passed into law and another without could help you plan a cushion on the adverse effects of new regulations.
By creating multiple scenarios regarding your organization's cash flow, you'll be in a stronger position to visualize potential impact, as well as quickly pivot and adapt to situations accordingly.
Differentiate Between Cash Flow and Revenue
Cash flow and revenue can paint a picture of the financial position of your company, but if you need accurate cash flow forecasts, you should separate the two. Income acts as a measure of the effectiveness of your sales and marketing efforts, which suggests that it will only focus on a single source of income.
On the other hand, cash flow refers to operational sales revenues and the monies your enterprise generates from sources that are not part of your core business, and that implies that this factor will determine whether your entity will remain functional going forward. In that case, even if your revenue projections are positive, you may discover that your cash flow value will sometimes be negative.
The approach that cash flow calculations assume is what gives you an authentic outcome that makes forecasts on the same more reliable.
Adopt, Monitor, and Refine Results
Overall, staying on top of your cash flow is critical. Forecasting is often something that many CFOs struggle with, and an inaccurate forecast will often cause just as much trouble as not having one at all.
No cash flow forecast should be set in stone. Once a cash flow forecast report is ready, monitor your company operations closely. It's inevitable that unforeseen expenses, payment delays, or another issue may arise that will affect your inflows. You also need to establish an acceptable budget variance on cash flow projections and make adjustments where necessary. Whenever the opportunity arises, refine cash flow forecasts for more accurate results.
Interested in learning more about how to develop an effective short-term cash flow forecasting system?
Contact Focused Energy about the keys to successful cash flow forecasting today!
