Advantages of cash flow forecast
cash flow forecasting can be defined as a partial plan of the company’s financial position in the near future. It tracks the incoming and outgoing cash from the business within a specified timeline. Cash flow forecasting can also be defined as an estimation of what the company’s cash position will look like in the near future, based on the company’s past performance and other data.
One of the advantages of preparing a cash flow forecast is the insight it gives you when predicting the timing of your future investments. There are also many other advantages of cash flow forecasting, some of which are mentioned below:
One of the advantages of preparing a cash flow forecast is the insight it gives you when predicting the timing of your future investments. There are also many other advantages of cash flow forecasting, some of which are mentioned below:
Therefore, cash flow forecasts can be regarded as a highly important tool and there are several advantages of a cash flow forecast which can be utilised in order to achieve higher thresholds of business efficiency in the increasingly competitive business world.
Importance of Cash Flow Forecast
A cash flow forecast is a tool used in financial planning or budgeting to show the estimated cash inflows and outflows of a business or a specific project. Understanding the forecasted cash flows of a company is a vital part of its finances. Cash flow forecasts typically consist of estimates for the upcoming 12 months but can also include shorter or longer periods.
The cash flows of a business play a critical role in its success, in addition to its profits. Therefore, companies need to keep a close eye on their cash flows, whether present or future, to ensure survival in the long run. A cash flow forecast acts as that tool that can help businesses proactively control their cash matters and identify any deficiencies on time.
Importance of Cash Flow Forecast
A cash flow forecast can provide businesses with many benefits. Some of the points that signify its importance include the following:
Conclusion
A cash flow forecast estimates the cash inflows and outflows of businesses. It can play a vital role in the success of the company. Among other things, cash flow forecasts act as a planning and monitoring tool, help track payments and receipts, ensure the timing of cash flows is sufficient, and help with decision-making.
Cash Flow Forecast
Do you run a business? Then you may be familiar with a cash flow forecast. Many business owners fail at this part of the business. Effective management of finance in businesses plays a crucial role in the success of any business as it involves the management of financial activities such as funds, investment, or general expenditure. A good cash flow forecast makes sure that a company has clear visibility of their cash position prior to making further investments or even making day to day payment decisions.
Which financial reports do businesses depend on?
There are three key reports which are needed for the proper functioning of business finances:
Therefore, it is absolutely critical for these reports to be up-to-date, accurate and provided on a timely basis.
Running a smooth operation
Behind every successful business, is a good cash flow forecast. In order to run a smooth business, cash flow forecasting is vital. It can be defined as the process of predicting the future cash position of any organisation based on cash inflow and cash outflow. It doesn’t matter whether you own a small business or a large one; a healthy cash flow and good cash management can save any business during challenging times
If you are new to business or you want to raise funds for business expansion, then you could take advantage of a good cash flow forecasting software. This type of software is best used when trying to resolve a cash flow crisis and also for giving you visibility of a future cash position in real-time, thereby, making business planning much easier and manageable.
Importance of cash flow forecast
Let’s have a look at an example to help you understand the importance of a cash flow forecast. Suppose you are planning to invest in a new sales manager. With a good real-time cash flow forecast, you can predict the impact such an investment will have on your bank balance today and in the future, helping you make well informed decisions.
Types of cash flow forecasting
There are two types of cash flow forecasting methods which are explained as:
How can organisations manage Cash Flow Forecasting?
In most companies, accountancy is controlled by the finance team or a cash flow manager. To predict the cash flow, they will need data from both systems and people. The accurate and exact data will result in a successful cash flow forecasting process.
Someone who is trying to create an efficient process for real-time updates will use cash flow forecasting software to predict the future.
Steps involved in cash flow forecasting
For a good direct cash flow forecast, the following steps would be required:
Step 1 : Sign up to a cash flow forecasting software.
Step 2 : Ensure your bank is regularly reconciled within your accounting software.
Step 3 : Ensure all your debtor balances are correct within your accounting software by logging all receipts from clients correctly and ensuring your billing is up to date.
Step 4 : Ensure all your creditor balances are correct within your accounting software by logging all payments to suppliers correctly and ensuring your purchase ledger is up to date.
Step 5 : List all business payments and receipts expected in the short term (within your accounting software) which do not require sales or purchase invoices such as taxes, business loans, asset sales etc.
To prepare a profit and loss forecast you will need to:
Predict your future sales. You can use your past data as a guide, but be mindful that past performance is no guarantee of future results.
Calculate the gross profit. It can be derived by subtracting the monthly costs of sales from monthly sales income.
Calculate your predicted overheads. You can use your past data as a guide, but be mindful that things change in business on a regular basis, so you should be prepared for changes and include some predicted changes.
The three points above will help you calculate your estimated profit before tax. But now you should also add in your expected tax liability as a percentage of your profit before tax. The percentage to apply will be based on your local tax rates.
How is it useful?
Having the ability to predict your future bank balance is absolutely vital. Remember; businesses don’t go bust, they usually just run out of money.
Predicting your future bank balance will help you make informed decisions on the future of your business.
Having visibility of your profit and loss is also vital as it will help you understand how well your business is performing.
Sometimes a new product or service may be significantly increasing your turnover, but it is a drain on your resources, so having a good profit and loss forecast will help you understand these risks better.
Turnover is vanity, profit is sanity and cash is king.
While predicting your overheads you will need to factor in various expenses, some of which have been listed below:
Employees’ wages;
Rent and utilities;
Travel & entertainment;
Web hosting and other internet charges;
Software packages and other subscriptions; and
Freelancers, accountants, solicitors, and other professionals.
How does a cash flow forecast work:
In order to prepare an accurate cash flow forecast, the software will factor in all the predicted cash inflows including sales income and other bank deposits expected such as tax rebates. Then it will factor in all the cash outflows including all business expenses and other payments such as rent deposits. Then, combine the predicted inflows and outflows. Now, it will bring them together and display a chart for your information. You will come out with any one of the two results:
Net Cash Inflow (means you’ve taken in more money than you’ve taken out); or
Net Cash Outflow (means you’ve taken out more money than you’ve taken in).
In the end, check the bank balance at the start of each period (opening cash balance) and at the end of each period (closing cash balance). If the bank balance is found to be increasing then the business is going in the right direction and may be ready to expand. Otherwise, it could be the right time to decrease the expenses, change the pricing structure, or look for other funding options. With the above simple steps to forecast, one can improve the cash flow forecasting process of a business and significantly increase the company’s chances of survival. Best of luck with your business and click here to read our article on the advantages of cash flow forecast.
How does a cash flow forecast work:
In order to prepare an accurate cash flow forecast, the software will factor in all the predicted cash inflows including sales income and other bank deposits expected such as tax rebates. Then it will factor in all the cash outflows including all business expenses and other payments such as rent deposits. Then, combine the predicted inflows and outflows. Now, it will bring them together and display a chart for your information. You will come out with any one of the two results:
In the end, check the bank balance at the start of each period (opening cash balance) and at the end of each period (closing cash balance). If the bank balance is found to be increasing then the business is going in the right direction and may be ready to expand. Otherwise, it could be the right time to decrease the expenses, change the pricing structure, or look for other funding options. With the above simple steps to forecast, one can improve the cash flow forecasting process of a business and significantly increase the company’s chances of survival. Best of luck with your business and click here to read our article on the advantages of cash flow forecast.