If your business consistently experiences low cash levels, it reflects poor financial management. Forecasting your company’s cash flow can not only help you make better informed decisions about the growth of your business but also prepare you to face any uncertainties in the future.
After launching a new business, startups often put all their efforts into generating profit and overshadow the importance of managing their cash flow. However, you can still be at risk of cash shortages if your sales payments are delayed in accounts receivable, even if your sales are high.
This is why being able to predict future cash inflows and outflows will serve you far better than focusing all your resources on making the highest profit.
Cash flow forecasting is one of the keys to creating reliable financial strategies for the future of your company. Forecasting your cash inflows and outflows can prepare you to tackle any challenges head-on and set up a better debt management system.
In this article, we have gathered five useful tips to make your cash flow forecast more accurate, enabling your company to thrive against any crisis and increase the chances of making decisions that will lead to healthy business growth.
1. Set a Specific Timeframe for Your Cash Flow Forecast
Before setting a time period for your financial projections, ask yourself what information you would like to get out of the forecast. Do you want to anticipate day-to-day operations or know how to budget to repay your loan payments on time?
⇒ Don’t shy away from seeking guidance from your CFO or any external accountant if needed, as their expertise can provide valuable insights for your company’s financial needs.
2. Collect Relevant Data Information
To make an accurate cash flow forecast, gather all financial documents from your company’s past. Once done, start analyzing the context of your data and begin forecasting your cash flow.
Are there any patterns such as seasonal fluctuations in profit and loss that you can identify?
Analyzing and understanding those patterns will help you make more informed financial decisions and provide the necessary data to predict future incomes and expenses.
⇒ Keep in mind that your cash flow forecast must give you the tools and knowledge to ensure you meet your financial obligations on time. Therefore, your forecast must be flexible to allow you to update it regularly.
3. Project Future Cash Income and Expenses
Predicting future sources of cash flowing into your business is sometimes vague and hard to predict, but your daily, monthly, and yearly expenses are usually recurrent. Make sure to start by gathering them first so you can highlight specific moments where you know you will need cash and plan accordingly.
Once done, you can start forecasting expected revenues. Sort out the payments you will receive directly after service from those where you have to wait 30 to 60 days before payment. Make sure to only include in your cash flow forecast the income you’re pretty sure will be in your bank accounts. Don’t overdo that step, as it could easily misguide you in your budgeting management.
⇒ Expenses can include: Rent, payroll, supplies, utilities, taxes… ⇒ Income can include: Deposits, prepayments, discount actions…
This step will maintain a trustworthy relationship with your stakeholders. Accurately forecasting your cash flow will help you plan in advance and ensure your short-term obligations are met. Paying your creditors, suppliers, and staff on time will give everyone better peace of mind and set your stakeholders in a better position to help you in case of an unexpected financial crisis.
Difference between Cash Flow and Revenue:
Don’t confuse your cash flow income with revenue. The latter measures the total profit your company is making, whereas cash flow measures the actual cash coming in and out at a certain point. Unlike revenue, cash flow can be a negative number or value, which is why even if your company’s profit is high, improper management of incoming cash can result in negative cash flow and lead to financial difficulties.
4. Identify Business Financial Future Needs
Include any future changes or growth projects you would like to see in your company in the cash flow forecast. This will allow you to create a reliable financial budget for the next few months of your company.
⇒ The changes can include: Expansions, employee recruitment, new locations, business events, employee training…
5. Prepare for the Future by Creating Different Scenarios
When drawing up cash flow forecasts, it can be useful to create different types of scenarios. It will enable your company to react quickly to any changes in the situation. Every new action you introduce to your business might influence the outcome in a different way, which is why the more you anticipate, the better prepared you will be against unplanned circumstances.
Taking cash flow forecasting seriously will lead you as a business owner to make more informed decisions; it will improve your problem-solving skills and overall build up strong financial management.
⇒ Regularly update your forecast to sharpen it as new financial information comes in.
Digit89: A Useful Tool for Cash Flow Forecasting
As you may know, one of the biggest challenges you can encounter when working on a cash flow forecast is predicting the exact time when the cash comes in.
Depending on the type of payment your client chose, it can take months after your sale for you to receive your payment (longer sometimes if the due date isn’t respected). This uncertainty affects your cash-flow management.
At Digit89, we offer a collaborative reverse factoring tool that allows you to optimize your cash flow by having true control over your invoice payments. The platform revolutionizes the relationship between the client company and its suppliers, allowing all the suppliers to receive the immediate payment of the invoices for their choice.
Indeed, as we are directly connected to your clients’ accounting system, you don’t have to do anything; all the invoices received by your clients are already on our platform. Moreover, you have free access to the platform, which gives you an overview of all the oustanding invoices. Then if needed, you can ask for an immediate payment (at a rate starting at 0.5%) receivable within 48 hours. This solution gives you a considerable push towards cash flow optimization.
Some of the advantages are:
- Flexibility, as you have the choice of selecting the invoices for which you want to receive early payment from Digit89.
- Quick and simple, as everything is managed upstream with your clients. Your invoices are already on the platform, you just need to visit it to receive your money in 48 hours on your bank account.
- Transparency, as there are no fixed fees and the access to the platform is free. The only cost is the transaction fee clearly mentioned on the platform for each invoices selected for early payment.
⇒ To learn more about our platform, visit our website: https://www.digit89.com/en/home/
To conclude this article, it is important to remember that making your business grow effectively depends on making informed financial decisions. To do so, you need to predict accurately all aspects of cash coming in and out of the company.
Maintaining an accurate cash flow forecast will set you up to be prepared for any unpredicted financial climate and will give you the right tools to meet your obligations towards your stakeholders on time.
Finally, know that no cash flow forecast should be set in stone. Adapt yourself to any changes that might occur; it is okay to keep updating your forecast as you receive new financial information. The purpose of cash flow forecasting is to give you all the data you need to anticipate accurately the incomes you can expect to receive and then expenses you can prepare to make over a defined period of time.
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