If you don’t already carry out a cash flow forecast, you’ve probably heard about them, and that they can be incredibly useful for your business. But, maybe you’re intimidated by it or, perhaps, you think it’s a waste of valuable time. Either way, in this article, we discuss how performing a cash flow forecast can help your business, and hope that we can persuade you to give it a go.
So, how does a cash flow forecast help a business? Cash flow forecasts help businesses to track their expected cash movements over a period of time, and predict cash movements in the future. This helps you to understand how much cash your business actually has available at any given time, meaning that you can make more informed plans and decisions.
Read on to learn more about how cash flow forecasting can help your business.
- Why is the Cash Flow Forecast Important?
- How Does a Cash Flow Forecast Help a Business?
- Cash Flow Forecasting Methods
Why is the Cash Flow Forecast Important?
There are a variety of reasons to perform a cash flow forecast, but the key purpose is so that you understand how much cash your business actually has available at a given time. This also applies to predicting how much cash your business will have on hand in the future.
But why does this matter? It’s crucial that you know how much cash your business has on hand (or is predicted to have), to be able to make good, informed decisions. It can also help you to make plans for the future and your company’s growth, or plans for change, purchase, and hiring decisions, which will help you to understand the general health of your business.
Without a cash flow forecast, you might find yourself with a lack of cash and resources available to keep your business moving.
How Does a Cash Flow Forecast Help a Business?
Now you understand why a cash flow forecast is important, let’s look at some specific ways in which a cash flow forecast can help your business.
Keep Track of Payments
As part of your cash flow analysis, keeping track of overdue payments can help you to keep an eye on your available cash, and provide you with key insight for future planning. It will also help you to identify any areas of concern in your credit control department so that you can deal with it before it has a chance to have a huge impact on your business.
Understand How Decisions May Impact Your Business
For small businesses in particular, your cash flow taking a hit, for whatever reason, could have a huge impact on your ability to run your business as normal. By performing a cash flow forecast, running various scenarios, you’ll be able to see how those scenarios might affect your business, allowing you to plan confidently and effectively.
Plan for Cash Gaps
A cash flow forecast should help you to identify any upcoming cash gaps, allowing you to put plans in place in advance to reduce its impact on your business and finances.
Track Goals and Targets
All businesses have goals and targets, many of which are time-sensitive. Cash flow forecasting can help you to understand when you might realistically reach these goals, as well as identifying anything that could stand in the way of you reaching your targets.
If you want to gain investment for your business, you’ll need to provide potential investors with an idea of what the future of your business looks like financially. This means that you’ll need to use a cash flow forecast, including your best, average, and worst-case scenarios.
Cash Flow Forecasting Methods
Quality accountants like ARB Accountants will usually be able to help you with cash flow forecasting if you don’t fancy doing it yourself, or if you don’t have the time or resources to do it yourself. However, if you want to go it alone, here are a few methods that might work for you.
First of all, you’ll need to know if you want to perform a short-term (30 days), medium-term (approx. 13 weeks), or long-term (1-5 years) cash flow forecast. From here, you can decide between direct and indirect cash flow forecasting.
Direct Cash Flow Forecast
A direct cash flow forecast predicts when cash will be coming and going from the business at a specific point in time. It is best for short to medium-term forecasts, and uses information from bills, invoices, taxes, payroll, and creditors.
- Detailed analysis at a granular level
- Easy to understand
- Focuses completely on cash
- Highly accurate in the short-term
Indirect Cash Flow Forecast
An indirect cash flow forecast predicts the movement of cash by using prepared financial statements such as balance sheets and income statements. This process is generally done as part of planning and budgeting, and is best for long-term forecasting. For more information on balance sheets, we’ve also written a very detailed article on how balance sheets help to make business decisions.
Business Forecasting with ARB Accountants
ARB Accountants are chartered accountants in Essex, with a team of business forecasting experts that can help you with cash flow analysis to help you to make better decisions and plans for your business. Get in touch with us today to learn more about how we can help.