Most small business owners hire an accountant to manage their bookkeeping and other finance requirements. It’s a great way to delegate key tasks and focus on business activities that will bring cash in. What most forget, however, is forecasting. And it’s not just any type of forecasting. It’s cash flow forecasting that can, in fact, help increase business profits.
Cash flow forecasting isn’t just useful in increasing revenue. It can give you an insight into the financial capacity of your business. Understanding your company’s financial status in the present and in the future can help you figure out how to keep the balance between cash flowing in and out of your business. This way, you’ll know how to spend your profits wisely.
Creating a cash flow forecast, however, can be time-consuming and requires a lot of work. It can leave you stressed and with a heavy headache. Save yourself the cost of going to a pain management doctor. Let this article explain to you what exactly is a cash flow forecast, how it can help your business, and how you can create one.
What is Cash Flow Forecasting?
A cash flow forecast is a type of financial report or document that contains the projected cash that your money is supposed to have over a specific time. It uses current historical data of your company’s income and expenses to come up with a forecast.
People often mistake a cash flow forecast for a cash flow statement. According to the Corporate Finance Institute, a cash flow statement is a report of cash that flowed in and out of your business in the past. It should be accurate, so you can make accurate cash flow forecasts.
A cash flow forecast can help you determine when your business is going to be busy or slow. It can make you understand how regular expenses affect your cash flow. You can also assess how to optimize your accounts receivable and invoicing processes through a cash flow forecast. It can also help you assess when to make capital investments.
Forecasts can be either short, medium, or long-term. However, longer forecasting is less accurate compared to shorter ones.
How to Develop a Cash Flow Forecast
To develop a cash flow forecast, you need to estimate your future expenses, or cash that flows out of your business, and sales, or cash that flows into your business. This allows you to assess the capacity of your business to grow. Will have enough cash to run your business in the next 30 days? Will you be able to expand your business in the next year?
When preparing your forecast, make sure the timing of your inflows and outflows are accurate. Remember, cash flow is all about timing. Here’s how you can develop a more accurate cash flow forecast in four easy steps.
Step 1: forecast your cash inflow and outflow
Start with choosing a period for your forecast. Often, businesses forecast their cash flow on a monthly basis, which is more accurate to longer forecasts.
Then, examine your sales from the previous year and look for trends. Take note whether sales remained the same, decreased, or increased. The numbers may change depending on unemployment rates, interest rates, your customer base, and the frequency of payments you receive.
If you’re a new business with no sales figures yet, you can examine your expenses. It can help you determine how much sales you should earn to pay for your expenses.
Step 2: estimate your cash inflows
There are many sources of sales, but the best way to estimate cash inflows is by listing all your business income. In your forecast, cash inflows should be organized into rows that are labeled for income, and columns that are labeled for each week or month. You can forecast your next sales based on this set of data.
Step 3: estimate your cash outflows
Repeat step 2 with your expenses. You can use this data to predict how much your business will spend for a specific period.
Step 4: put together your estimates into your cash flow forecast
Compile your cash inflow and outflow estimates. Add all your inflows and outflow separately. Then, deduct your outflow from your inflows. The difference is your closing cash balance, which you will use to compare with the balance from your next forecast to determine whether your business is earning enough.
Make Sound Business Decisions
Finally, with a cash flow forecast on hand, you can operate and expand your business. It can help you make sound decisions that will keep your business running and growing. It’ll allow you to invest in a new piece of equipment, rent additional office space, or hire a new employee.
Grow your business today. Develop your own cash flow forecast using the tips above.