How cash flow forecasting can impact the performance of your business growth?
As Sir Richard Branson puts it “Never take your eyes off the cash flow of a business because it is the life and blood of a business.”
What is a cash flow document, and what is the use for it?
Net cash flow and its importance
Why should I start paying attention to cash flow?
What is the purpose of cash flow forecasting?
Related: Read how a professional accountant on board can help your startup grow.
How can cash flow forecasting help a business with growth?
According to the Office of National Statistics, 90% of the businesses in the UK fail due to cash flow issues. This is because they might not be allocating cash resources correctly. Entrepreneurs have several business decisions to make when running a growing business, aligning the resources of the business with key decisions can be crucial towards business success, e.g. dedicating all your cash to running the operations of a business can be detrimental to the success of a business if nothing is allocated to growth such as marketing or sales etc.
Cash flow forecasting is one tool that can be extremely useful in managing resources effectively, in turn improving business performance, returns and growth.
Managing your cash flow is crucial to decision-making; as a growing business, you might want to purchase a bigger office or hire more employees; a decision based on the profit of the business alone could be highly misleading. Businesses such as wholesalers can have large sales due to their bulk selling nature, however, the payment terms with customers can be delayed which can result in a cash negative position. In this scenario, if you were to make business decisions just by looking at the profit, you might run short of cash and fall into a terrible cash position when making actual payments. Decisions such as these can have a huge impact on a business’s credit history and purchasing power, with proper cash flow forecasting in place you can avoid such issues.
Another way cash flow forecasting can be key for business growth is by understanding the gaps in cash flow, profitable businesses with cash shortfalls will mostly if not always identify process weaknesses due to cash shortages such as weak credit controls or improper supplier and customer payment terms. Using these revelations to improve processes or implement temporary solutions such as invoice financing or factoring to cover cash shortfalls can be key to improving business performance and growth. This will help you maintain your business growth without any major delays. Alternatively, investing cash surpluses to plan for cash shortfalls can also be important when planning for a rapidly growing business.
Planning for pricing and discounts can be complicated, from considering break-even to profit margin, net profit and operating margins, a slight miscalculation can result in the business not having enough funds to pay for its products or operations. Pricing strategies include cash flow forecasting as a major component, using strategies such as reduced pricing or discounts can help improve business cash flow, use that in conjunction with other strategies and your business can become a well-oiled cash-generating machine. We have formulated a price strategy guide where you can learn more about various pricing strategies.
In summary, cash flow forecasting can extend its value to various functions of the business. It is an excellent option to promise effective debt management. Besides debt management, good cash flow can always provide the extra strength and capability needed to grow a business. It can help businesses grow in terms of their infrastructure, assets and inventory. It can also provide insight into how much money you should be putting into your research and development to introduce new products in order to drive up sales. Cashflow forecasting can also drop hints on how much you should be spending on your employeeโs training to increase their overall productivity.
Ideal cash flow forecasting will help you get a firm grip over your companyโs cash flow and make it stronger. Strong cash flow helps businesses position themselves in the market in a more strategic and proactive manner. The strategic and proactive approaches can then let a business victoriously pass through all of its growth stages.
“Tip: Visual guide showing steps to cure cashflow problems.“
What is cash flow forecastingโs role in effective financial management?
Excellent cash flow management is subject to informed decision-making. Informed decision-making is only possible when the company has enough information about its current financial situation.
Predicting the company’s financial position in the future based on the company’s current finances is what cash flow forecasting is all about. Cashflow forecasting, one of the primary components of financial management, is a process of estimating the firm’s future financial position based on expected payments and receivables. The forecasting process usually covers a period of the next 12 months and provides strategic information accordingly.
What are the methods of cash flow forecasting?
There are primarily two methods to forecast cash flow- Direct forecasting and Indirect forecasting. Companies employ a direct forecasting method when they have to predict the level of cash flows required for liquidity management in the short run (less than 90 days).
When a company plans to devise long-term financial policies, it utilizes the indirect method of cash flow forecasting. The indirect way is ideal for predicting the firm’s long-term financial circumstances by manually developing a cash forecast based on anticipated income and balance sheets.
Mentioned below are the steps to forecast a companyโs cash flow on a spreadsheet:
- Start the process by entering your current account balance and the amount of cash on hand.
- The next step is to predict your cash in-flow from different sources, for instance, sales and estimate the amount of cash you expect to flow in your business bank accounts. Also, take note of the changes you wish to make in the future, such as changes in the marketing strategy, which might help drive up the companyโs total sales.
- You need to work out how you will invoice and gather payment from clients. Figure out whether you will get paid at the time of service or billed on a 30-60-day term. Ensure that you do not include expected income on your cash flow forecast until you are pretty sure that it will be in your bank accounts.
- Moving on, you now have to estimate your daily, weekly or monthly expenses. Work out your regular, non-regular or semi-regular expenses. You also need to predict your indirect and overhead expenses.
- Take account of the receivables and expenses flowing in and out of your company, and ensure that you update your actual figures accordingly to forecast accurately. Analyze your estimated figures with your predicted figures and work out how the resulting differences impact the businessโs future cash flow. Plan future changes for anticipated positive or negative cash flow in the future and take appropriate actions that will help you get better control over your companyโs cash flow in the future.
How is the cash flow forecasting process managed?
An employee from senior management usually supervises the cash flow forecasting process. The person responsible often is the one who has extensive expertise and experience in the finance sector and is in touch with every department of the company. The finance director or financial manager is most likely to supervise the cashflow forecasting process of a company.
The person in charge has to source data from both the employees and the accounting system. The more complex the structure of an organization, the more systems will be required to help with the process. Therefore, it’s feasible for process supervisors to identify and define different sources of cash flow data early on.
What are the top tools to help you with cash flow forecasting?
Our accountants have prepared a list of the top 4 tools to help you control your small business and its cash flow:
Float
Basic features
- Easily integrates with otherย appsย with cloud accounting software
- Gathers information automatically
- Helps prepare a cashflow forecast with scenario-based modelling
Pricing (GBP):ย ยฃ49/month (Essential), ยฃ99/month (Premium), ยฃ199/month (Enterprise)
CashAnalytics
Basic features
- Forecasts and automates various cash flows from various sources
- Quick reporting and consolidation
- Conducts Quality variance and accuracy analysis
Pricing (GBP): Price depends on the tailored solution presentedย
Pulse
Basic features
- Helps maintain and track the companyโs cash flow
- Integrates with other cloud accounting software to prepare automated forecasts
- Tracks cash flow in different currencies
Pricing (GBP): ยฃ29/month (Basic)
PlanGuru
Basic features
- Can accurately budget and forecast for up to 10 years
- Built-in integrated financial statement infrastructure
- Can help forecast using non-financial data
Pricing (USD): $99 (Monthly Plan) -> $29/month for every additional user, $899 (Annual Plan) -> $299/year for every additional user
Dryrun
Basic features
- Helps track invoices, bills and due dates
- Can import data from Xero and Quickbooks online to prepare a cash flow forecast
- Allows full manual control and flexibility
- Can automatically forecast future cash flow
Pricing (USD): $199/month billed annuallyย (Advanced), $149/month billed annually (Business), $99/month billed annually (individual)
Related Article: Best Cloud Accounting Software For Small Businesses
What are various methods to improve a companyโs cash flow
There are several ways through which business owners can improve their cash flow position:
- If you have an unused business vehicle or a space in the warehouse, try renting out these unused assets to other businesses for an inflow of business cash.
- You can always request your vendors for flexibility in payment terms, like paying for their services in instalments. Alternatively, you can reduce debtor days and increase creditor days. This will have a positive cash impact.
- Offer discounts for early payment of invoices.ย
- If borrowing, ensure that you pay a minimal amount of interest. Try consolidating all of your debts into one long-term debt so that you pay a lower interest rate.
- Get the burden of debt off your shoulders as quickly as possible. Debts can trigger a negative cash flow.
How can Accountants help a business manage cash flow?
Accountants are responsible for helping a company manage its cash flow. While doing so, they have to consider several things before making any decision. For instance:
- They have to search for profitable investment opportunities while making sure that they don’t drain the company’s cash by investing in risky assets unnecessarily.
- They have to devise and implement different strategies for debt collection.
- They have to balance the level of cash inflows and outflows to avoid negative cash flows in the future.
- They have to help the business prepare a cash flow forecast and track and monitor its performance.
Clear House Accountants are experienced Accountants who have years of experience in handling the financial affairs of startups and small, medium and large size businesses.ย Our growth accountants ensure that your company passes through every stage of business growth successfully while saving business owners time and money.