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Cash flow forecasting

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Cash flow forecasting for your business

Cash flow forecasting helps you plan for cash gaps and surpluses before they happen. It helps you figure out exactly how much money your business has, how much money it could and should have, and all the things you can do with it.

Did you know that 82% of companies that go out of business do so because of poor cash flow visibility and management? Knowing your cash position is vital to understanding your business’s numbers, staying on top of the flow of your cash and making proactive decisions to help your business grow.

What is cash flow forecasting?

A cash flow forecast is a plan of when cash will come into and out of your business, while clearly showing what you’ll have in your bank account at the end of the month.

It’s the most reliable tool you can have in your arsenal to give you a better understanding of your business. If cash is the lifeblood of your business, then cash flow management is the process of keeping your business’s heart beating.

Why is cash flow forecasting important?

Cash flow is the movement of money in and out of your business. It’s always flowing so it’s never a static number. Outgoing expenses, incoming payments, bill timing, and business fluctuations all impact your bottom line.

It’s more than thinking about money in versus money out.

Cash flow is more than having money in the bank, and good management is key to making sure your business’s future is bright. When you have clear insight into your future cash position you can effectively plan for and manage any financial situation.

Does my business need a cash flow forecast?

A cash flow forecast gives you insight into your business’s future cash. Knowing that you have the right money at the right time helps you be proactive in your business. Incorporating a forecast into your financial management systems also gives you the ability to predict problems before they happen and helps you grow at a sustainable rate.

Remember: success starts with planning. Sales increases, lost revenue, unexpected costs, new hires, or seasonal fluctuations are easily planned for when you create cash flow forecasts. A live forecast that integrates with your accounting software can help you see upcoming gaps that your spreadsheet would have missed or when you’ll have the cash to reinvest in your business.

What are the benefits of cash flow forecasting?

Here are some of the many ways cash flow forecasting can help your business:

  • Manage cash shortages and surpluses
  • Scenario plan for future ‘what if’ questions
  • Track spending and stay in budget
  • Plan for ‘lumpy cash flow’ and project work
  • Pay your suppliers on time
  • See the impact of late payers and improve credit control

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FAQs

From keeping track of overdue payments to foreseeing upcoming cash flow gaps, there are numerous advantages to cash flow forecasting. Find out more by reading our article on the 7 advantages of a cash flow forecast.

There are two main methods for calculating a cash flow forecast, known as the direct and indirect methods. The direct method is ideal for short to medium-term planning, while the indirect method uses your P&L combined with your balance sheet for a longer-term forecast. Want to know more? Read our article that explores the differences between direct and indirect forecasting to learn more.

In Float, our scenario planning tool helps you build potential ‘what if?’ situations into your cash flow forecast. This means you can plan for important business changes like moving office or hiring a new employee. Find out more about scenario planning.

When it comes to budgeting, a profit and loss or a balance sheet will give you a snapshot of what is happening right now, it won’t show you the future in terms of the cash you will actually have. In other words, it won’t be ‘real’. With a cash flow forecast that has been updated with your actual financial data, you can compare your best guess to what really happened, helping you see if you need to update your forecasts.

A cash flow forecast that takes into account invoices for your debtors and bills from your creditors will help you more easily identify who is consistently paying you late. You could go a step further to model different payment dates on overdue invoices to see the true impact of late payments on your cash flow.

The best way to improve your cash flow forecast is to make sure everything in your accounting software is kept up to date. As Float automatically syncs with Xero, Quickbooks and Freeagent, you can then update your cash flow at the click of a button.

Some people still use a spreadsheet to keep track of their cash flow forecast, which doesn’t update automatically.

A well-designed cash flow forecasting model can be the tool you need to make sound decisions for your business. The cash flow forecasting model you choose can be as complex or as simple as it needs to be, depending on what information your business requires.

A cash flow forecasting model is the reporting structure plus the associated logic that helps you create a forecast. Typically, a cash flow model looks at two types of data:

  • Actual cash flow
  • Forecast cash flow

In other words, what does your cash flow look like now – and what does it look like in the future.

A cash flow forecast model tends to be built using two dimensions. Firstly, the reporting period – depending on how granular you want your forecast to be you may choose a model that is monthly, weekly or daily.

The second dimension is cash flow classifications – meaning the cash which is actually coming into and going out of your business.This is the way in which you group your cash inflows and outflows into meaningful categories for management reporting.

Choosing a reporting period – daily, weekly or monthly – will guide you towards the right cash flow model for your business.

Daily reporting is most useful for businesses focused on short-term liquidity management or those that require a high level of detail of the business’s day to day cash movements.

When selecting a cash flow forecasting model, use your business objectives to guide you. How much detail you need (or don’t need) depends on your business goals. By understanding which important data points you need to understand to hit your business goals, you’ll get a clearer picture of how granular you need your cash flow forecasting model to be.

For example, if you want to manage paying off business debt, a forecast that looks at least 12 weeks into the future and is updated on a weekly basis will likely work best towards achieving that goal.

Float makes the cash flow modelling process simple and straightforward. Float uses real financial data to model your cash flow and helps you see your cash flow on a daily, weekly or monthly basis to suit your business needs.