What is a cash flow forecast?
Cash flow and forecast – this is a tool you can use to help you predict the cash flows of your business or personal finances over a certain period of time. This works to estimate your bank balance at the end of each period this is normally worked out in months.
Image source: https://readyfundgo.com/the-importance-of-cash-flow-forecasting/
Advantages of projecting cash flow
Forecasting helps you to pinpoint and analyze if your current income and expense budgets are accurate or way off the mark. You will be able to manage and monitor your income and expenses. This will give you time to make changes to make sure that you stay on track.
Another useful outcome is finding out if you are overspending on any or all items. You will be able to identify these expenses and take action to make the required changes to lower your expenses.
Monitor income movement
It is very important for a small business to know when money moves in and out of your accounts. Using cash flow forecasting tools help to identify cash shortages well in advance, giving you time to negotiate with suppliers, secure financing, change credit terms with clients or tighten up your payment terms to bridge the cash gap.
Excerpts from: https://www.probooksny.com/5-ways-cash-flow-forecasting-can-improve-business/
Spot new growth opportunities
Your cash flow and forecast helps to anticipate your future cash levels. Being able to predict your cash flow will give you the opportunity to determine which new business or marketing growth opportunities are worth pursuing vs. passing on. Your forecast will allow you to spot cash surpluses that can be reinvested for growth, having too much cash or working capital in the bank could mean it is gathering dust.
This could lead to missed opportunities to grow your business.
Why doing a cash flow is important
Cash flow is the life of your business, it is what allows your business to continue to function. It is essential that you take the time to sit down and forecast your cash flow. Here are the reason why:
1) Identifies potential shortfalls in cash balances
Cash flow and forecast will help you to identify when you or your business may run short on cash. This will help you to be able to change your plans and ensure your don’t make commitments you won’t be able to keep.
2) Attention of customer payments
Keeping cash coming ensures your business will always have money to meet your obligations. Making sure that your customers are paying their invoices on time is very important. Chasing your customers is not a nice job but it is very important.
3) Ensures you can pay your suppliers and employees
Suppliers who don’t get paid will soon stop supplying you. Without the suppliers and employees your business cannot survive.
Tips to prepare your forecast
1) Always be conservative – When estimating your expenses, estimate that they will be higher than than you initially thought. When forecasting your income estimate it will be lower than you expect. By doing this, it will give you a worst case scenario. It will help you to understand that even when things don’t happen as you planned, whether the business will be able to survive.
2) Focus on timing – Predicting the timing of your income and expenses is the key to a good cash flow forecast. The timing of cash flow is what will help to identify if there is going to be a shortfall and ensures that a business will be able to pay its debts as and when they fall due.
Sources: https://readyfundgo.com/the-importance-of-cash-flow-forecasting/
If you need assistance with your Cash Flow and forecasting – contact me. https://ndpbookkeeping.com/contact-form/