A successful cash flow management is a key component in making your business grow steadily. Therefore, you must master cash flow forecasting to manage and maintain your cash flow efficiency.

Cash flow is the money that comes in and goes out of a company’s daily processes, impacting its liquidity. One of the main concerns of a company should be avoiding a negative cash flow position, often overshadowed by the need for higher profits. However, if cash flow is managed accurately, it can act as a safeguard during unexpected crises and save your business from running short on cash and failing.

The purpose of cash flow forecasting is to help you manage your company’s money in a way that ensures timely payment of invoices and loans, and, more importantly, keeps you away from a poor cash flow position that could lead to financial difficulties.

In this article, we will guide you through the importance of cash flow forecasting, how to predict future cash flows, and we will introduce tools that will improve your cash flow management.

The Need for Accurate Cash Flow Forecasting

You should know that it is common for businesses to experience cash flow shortages from time to time, even the best of them. Therefore, if you don’t dedicate enough time and resources to build a strong and accurate cash flow forecast, you run the risk of making mistakes that will harm your business in the long term.

“In 2018, CB Insights analyzed 101 failed startups and found that running out of cash was the second most common cause of failure, impacting 29% of businesses,” says an article from Bench.co.

Cash flow serves as a vital gauge of the financial movement within your business, tracking the inflow and outflow of money. Cash flow forecasting goes a step further by anticipating these cash movements over specified periods, be it days, weeks, months, or quarters. The advantages are multifaceted, enabling your business to:

1. Anticipate and address potential cash shortages proactively, facilitating more informed financial decision-making.
2. Ensure timely payments of invoices and debts, fostering financial stability and credibility.
3. Uphold a positive reputation with suppliers, team members, investors, and other stakeholders reliant on your consistent cash flow.
4. Strategically plan for growth, leveraging the full potential of cash surpluses.

For businesses, regardless of size, an accurate forecast is indispensable. Even during periods of high sales, the risk of cash shortages looms if delays occur in accounts receivable payments.

Cash flow forecasting presents challenges stemming from information gaps and inherent uncertainties. Fortunately, tools exist to provide the necessary information and empower you to take control of your cash flow, thereby substantially enhancing your cash forecasting capabilities.

Predicting Future Cash Flows: A Step-by-Step Approach

Here is a step-by-step approach our team has gathered for you to successfully predict your future inflows and outflows:

1. Collect financial data

The first step to producing an accurate cash flow forecast is to collect as much financial data as possible. You have to gather entries of cash coming in and going out of the company’s past from all different sources – sales, stakeholders, employees, supplies, etc.

The second step is to gather the current account balance and the amount of cash on hand.

Finally, before diving into numbers and estimations, you need to determine the period of time for your forecast, which will depend on the purpose behind it. What areas of the business would you like the forecast to cover? Day-to-day expenses, loan payments, long term growth, etc.

Keep in mind that the longer the period, the harder it is to produce an accurate cash flow forecast.

2. Identify the patterns and predict the figures

Once you have established a detailed plan of the company’s current state and background, you can dive into the analysis of patterns, predicted figures, and anticipated future financial scenarios. This approach will help you look for cash flow seasonality, trends, and anomalies, allowing you to make accurate estimations for the upcoming months.

It is crucial for your company to predict figures as precisely as possible for the period your cash flow forecast will cover (usually 6 to 12 months). Your goal is to estimate the cash flowing from all your income sources (sales, loans, government assistance,…) and your expenses (supplies, special events, employees, …)

Another point you need to look out for is the impact of past discounts or promotions on sales as it will provide valuable insights into seasonal patterns that may affect your business. Once sales estimations are determined, factor in the timing of receipt for a more realistic cash flow forecast, aligning with your payment terms.

Know that there are various factors that can influence forecasting, such as the mode of income reception and the payment behavior of key customers.

By incorporating these considerations into your forecasting process, you can develop an accurate and reliable cash flow projection, providing valuable insights for effective financial management.

3. Factor in business changes

Your cash flow forecast must include any expansions, contractions, or significant business events that could potentially influence the accuracy of your predictions.

You have to anticipate as much as possible by making different types of scenarios. This will allow you to be prepared for any unforeseen circumstances and survive in case of an unexpected crisis.

4. Use the technology that is available**

An effective method to enhance your business’s cash flow management is by utilizing appropriate tools. The Digit89 online platform enables your company to track the status of invoice processing by your clients and determine when you wish to receive payment for your invoices.

Through this tool, your company gains access to valuable information regarding the processing of its invoices by clients, ensuring invoice reception and approval status. This functionality aids in improving cash-in predictability.

Furthermore, our solution empowers your company with complete control over your cash flow by providing the ability to decide when you receive payment for your invoices. Digit89 allows you to request immediate payment of your invoices through the platform, offering a seamless and efficient financial management solution.

Improve Cash Flow Management & Reduce Uncertainty

1. Challenges associated with cash flow forecasting:

• Information Gaps: Gathering data can be time-consuming. For instance, obtaining details about the processing of your sales invoices may require sending emails or making calls to clients.
• Uncertainty: Even with information, predicting future events can be challenging due to the uncertainty. For instance, while you can estimate cash-in timing based on the concluded payment terms, unforeseen delays in client payments are difficult to predict.
• Lack of Control: The decisions you make based on your cash flow analysis can be hindered by a lack of control over your clients’ payment terms.  For example, if your analysis indicates a cash shortage, securing early payment of invoices, even with a discount offer, can be challenging as the decision rests with your clients.

2. Digit89 solution:

Digit89 is an online platform on which companies with annual purchases exceeding 50 million euros can plug their accounting systems, providing a powerful solution to their suppliers. If any of your clients have joined Digit89, you can tap into these advantages by simply logging into your Digit89 online interface.

• Dashboard: Gain real-time information on the processing of your invoices by your clients. The platform provides insights into your clients’ accounting systems, enabling you to effortlessly monitor the status of invoices issued to them. Access valuable details, such as confirmation of invoice reception, approval status, and early identification of potential issues. This will significantly improve the accuracy of your cash flow forecasting, resulting in a time-saving benefit.
• Immediate payment option: Through your Digit89 online interface, you can also request the immediate payment of the invoices of your choice in exchange for a small discount fee. Thanks to Digit89, you will have total control over your cash flow, deciding when you receive payment for your invoices. Beyond the cash flow optimization associated with faster payments, it helps eliminate uncertainty. You gain accurate visibility into your cash inflow and mitigate the risk of late payments. This tool enhances your cash flow forecasting but also provides you with the ability to take proactive actions to solve cash flow management issues.

⇒ To know more about collaborative reverse factoring: https://www.digit89.com/en/unlocking-working-capital-the-rise-of-collaborative-reverse-factoring/

Conclusion

Putting efforts and resources into cash flow forecasting will pay off in the long term. It is intricate and time-consuming to properly gather information to ensure the future of your company. However, this will help you maintain your business growth without any major delays. Making different scenarios about cash inflows and outflows will get you prepared in case of any unexpected course of events.

Keep in mind that relying on an accurate cash flow forecast will give you the data to make informed decisions, improve your problem-solving capabilities and overall, strengthen the financial management of the company.

Finally, it is also in your best interest to maintain a good relationship with your suppliers, team members, investors, and any other stakeholders relying on your cash flow.

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