To succeed in business, you need to be one step ahead of the competition. Cash flow forecasting can help you do that by anticipating how much cash you’ll have in the immediate future or years from now. Having a clearer picture of your cash flow in the months and years ahead can help you make smarter decisions when it comes to marketing, expansion and overall growth.
But what exactly is cash flow forecasting, and what are its benefits?
What is Cash Flow Forecasting?
Cash flow forecasting is the process of estimating or projecting how much cash will flow in and out of your business over a given period of time. The forecast is based on the business’s income and expenses.
Cash flow forecasting can cover a short period of time, or it can be used for long-term projections.
- A short-term forecast can estimate how much cash your business will have in the next 30 days, so you can budget and identify potential funding needs in the immediate future.
- A medium-term forecast may cover a 30-day to a one-year period. Looking at your projected cash flow over a longer period of time can help you identify future funding needs and start making preparations now.
- A long-term forecast may cover one to three years and help businesses look at their funding needs well into the future.
Cash flow forecasting allows you to make plans and anticipate different scenarios, allowing you to make informed financial decisions.
5 Benefits of Cash Flow Forecasting
Businesses benefit greatly from cash flow forecasting. Here’s how:
1. Identify and Plan for Potential Cash Gaps
Accurate cash flow projections can help businesses identify potential cash gaps and create a plan to address the problem now. Anticipating cash shortages and finding ways to close that gap can help businesses avoid missed or late payments.
2. Identify and Allocate a Cash Surplus
On the other end of the spectrum, cash flow forecasting can help businesses identify a cash surplus. If you know that a surplus is on the horizon, you can determine how to allocate those funds to support growth or save for a rainy day.
Socking away that excess cash may sound like a good idea, but your business will benefit more from putting that cash to work. Proper allocation of a cash surplus may allow your business to invest, expand or launch new products/services that give you a competitive advantage.
3. Collect the data to forecast cash flow
Forward forecasting is as accurate as possible and works for most of the business purposes that companies make forecasts to support. So, you need to focus on where to find the actual cash flow data for your forecast. Most of the actual cash flow data you will need to make your forecast can be found in bank accounts, accounts payable and receivable, or the accounting software you use.
4. Plan for “What If” Scenarios
Understanding and projecting your cash flow can help you better prepare and plan for “what if” scenarios. No one can predict the future, but you can be prepared for different possible outcomes. Cash flow projections can play a vital role in those plans and preparations.
Understanding and planning for these “what if” scenarios will allow you to act quickly and confidently no matter what situation arises.
5. Help Your Business Create a Plan to Get Out of Debt
Many businesses rely on financing to get up and running or to expand. For these businesses, debt accounts for a large portion of their expenses. Accurate cash flow forecasts can help companies develop strategies for getting out of debt faster.
How Automation Can Streamline Cash Flow Forecasting
Traditional cash flow forecasting methods can be time-consuming and arduous. Today, businesses are using automation to streamline their cash flow projection.
Using cash flow forecasting software and the best apps for QuickBooks online can help businesses save time and reduce the risk of human error when forecasting cash flow.
Automation can:
- Use your accounting software to automatically and accurately make cash flow projections. These tools gather your income and expenses and use this data to help predict your future cash flow.
- Help you quickly and accurately plan for what-if scenarios. Automation tools can simulate the consequences of actions you take, helping you make smarter business decisions.
- Save you time and resources by creating forecasts in a fraction of the time it takes a cash flow analyst.
Cash flow forecasting benefits businesses in many ways, and automating the process will save time and money while improving accuracy. Whether you’re in the initial stages of launching your business or looking to expand, cash flow forecasting can help you make smarter decisions that can lead to future growth.
