Business owners like you can deny it all you want, but you depend greatly on your customers for the money you receive each month. In some cases, unplanned expenses can disrupt your cash flow. That's why an accurate cash flow forecast is a must for every business. However, a precise cash flow forecast is easier said than done.
The forecast process should allow your business to plan and strategize any issues that may occur within the month. You'll surely thank yourself for avoiding huge cash flow catastrophes when the forecast is done properly. In this blog post, we'll share some tips to help improve your cash flow projections.
What Is Cash Flow Forecasting?
Cash flow forecasting is similar to budget planning, but in this process, you focus more on the money coming in and out of your business. It is rare for businesses to have cash shortages, especially when business is booming and you directly exchange cash for your goods and services.
However, there are some businesses that receive payments on schedule, and they must carefully plan their operation costs until the payment comes through. For example, you rent out a unit space for $1,000 a month. If you have ten units, you'll expect to receive $10,000 at the end of each month. But within the month, you should also have enough resources to pay for electricity and other bills.
Cash flow forecasting will help you see what to expect within a time frame. Will you get $10,000 at the end of each month? If not, how much cash will you receive, and how will your money move to cover the cost? All these forecasting results will be based on the past data of your business.
5 Tips for Improving Cash Flow Forecasts
The more accurate the cash forecast, the better you can plan for your time-specific cash flow. Here are some practices you should note to improve your financial forecasting.
Start Documenting Business Plans
Most of the forecasting process is built around historical data. So it's important that you document all your business plans to build your cash flow forecast around it. For example, last year showed that your revenue increased by 40%. So it's possible that you will go on the same trajectory.
From there, you can make changes to your business plans. If your business continues to increase revenue, you may need to stock up your inventory to keep up with the sales. You can also create budget proposals to expand your business, get a new physical space, and hire more employees.
Turn Your Plans Into a Budget
Once you know the changes that will happen around your business, don't let the plans stay as plans on paper. Instead, draw up a budget to transform a plan into action. Considering the previous example, if you plan to expand your business by getting a bigger space and hiring new employees, it's best to lay out the budget for the costs so you can picture what happens to your cash flow.
Proposing a budget ensures that big and unplanned expenses will not strain your cash flow. Furthermore, seeing your budget helps you make better business decisions.
Make Long-Term and Short-Term Cash Flow Forecasts
It's best for businesses to make long and short-term forecasts. Long-term cash flow forecasts can involve projecting your cash flow for the entire year, while short-term cash flow forecasts project your cash on a monthly basis.
Long-term forecasts are less accurate since they are mostly based on assumptions and greatly depend on your monthly cash flow outcome. There are different factors that can affect the annual cash flow forecast, but you can be optimistic when making your predictions.
On the other hand, short-term forecasts are more accurate, and it is crucial that you make these as realistic as possible. You can make a short-term forecast based on the business's past performance, making predictions more precise.
Build Different Scenarios for Cash Flow Projections
Every business wants a positive cash flow. Of course, there will be good days for your business, but it is also important to prepare for the worst. When preparing cash flow predictions, consider every possible scenario that can occur in your business.
If you predict that your monthly production and sales volume will increase, you can expect more revenue, but you also need to plan to cover the cost of increased production. However, when you don't hit your monthly quota, what will you do to cover the other expenses of your business?
There may also be times when a piece of equipment needs replacing or you need to renovate your space. You should also cover the big expenses in your forecast to ensure you are ready for every scenario possible and make intelligent decisions based on your planning.
Optimize Working Capital
Optimizing working capital is important to cash flow forecasting. As business owners, you should prioritize understanding your accounts receivables, payables, current assets at hand, cash flowing in and out of your company, and when it happens.
Optimizing your working capital gives you a clear picture of your business's cash position. As a result, you will have better and more accurate cash flow forecasts for a specific period.
Why Do Businesses Need Cash Flow Forecasting?
You may think that cash flow forecasting is only for big companies. You’re wrong! Every business should know how money will move around their business. Here are some reasons why you should do cash flow forecasting.
- It helps identify potential issues: Cash flow forecasts can help your business determine which months you could experience cash deficits. You can strategize and make business plans accordingly, so your business doesn't suffer when it happens.
- Cushions the impact of cash shortage: There will be months when business is slow, but you can still run your business smoothly when you are prepared. If cash inflow is slow, you could step up with collecting your receivables. If you have a surplus of items from previous months, you can use that to lower your production costs.
- It's a positive nod for your employees and vendors: Late payments to your suppliers and employees are bad for your business image. When you know the money you will have in a specific period, you can guarantee that you can pay your obligations on time.
How To Improve Cash Flow Forecasts? Try Unloop!
Improving cash flow forecasts entails a lot of work. Of course, you want it to be as accurate as possible. But forecasts are greatly affected by human error. Accounting services can provide the best forecasts for your business if you want accurate forecasting.
Unloop is the all-in-one solution for your accounting needs, and yes, we do forecasting! We forecast revenue and cost of goods for every dollar. We identify potential strains on your business and make tailored plans for you. So book a call with us and work with our experts today!