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 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.
Which financial reports do businesses depend on?
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
Types of cash flow forecasting
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.
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.