Cash Flow Forecast: Understanding Your Numbers

Farwah Jafri | June 16 2021

As a business owner, it is very important that you know how much money you have left, and if it is sufficient to meet your short-term cash needs. Specially, the recent economic downturn due to the pandemic has made it even more crucial that we are able to project the company’s future financial position based on anticipated payments and receivables. To ascertain if you have adequate cash reserves for short-term viability, it is essential that you have an accurate cash flow forecast set up for your business.

So, What Is A Cash Flow Forecast? 

A cash flow forecast simply helps you project your company’s future financial position based on your income and expenses. Like a weather forecast predicts the weather for the next week, similarly a cash flow forecast tells you how much money will be moving in and out of your business and how much difference it’s going to make to your ROI.

Why Should You Use A Cash Flow Forecast?

Your cash flow forecast can include your projected earnings, your expenses, and it is usually sketched up to cover the next twelve weeks of spending for a business. It is regarded as one of the most crucial tools a businessperson can have to ensure a steady and stable income in their business. Executed well, your cash flow projections will aid you in having a rich understanding of:

  • Whether your business is generating enough revenue to stay operational in the long term
  • . Whether your business is developing at the rate you want it to
  • . Whether you need to arrange financing/bank loan to meet short term obligations
  • .Whether you should start considering alternative options and abandon ship.

Forecasting your cash flow can bring a vast amount of clarity about the future of your business and helps you grasp a comprehensive understanding of where and when your business is losing cash by looking at your projected accounts receivables and accounts payables.

If you are looking to adopt a proactive financial management strategy into your business, then forecasting your cash flow can be a great asset to bring clarity to your numbers.

What Is A Cash Flow Forecast Used For? 

Informs You Where The Cash Is Going

Cash flow forecasting gives you an exact representation of the comparison between how much you are actually earning and how much you’re spending. With these statistics, you can know whether your business is either under-or over-performing or doing better than expected and allows you to adjust your budget accordingly.

Decreases Production Costs 

Every business operates at its own pace. But having a thorough and rigorous cash flow forecast can help you broadly identify what the base-level needs of your business are to function optimally. It is also handy for identifying opportunities where you can cut back on operating costs and increase your overall ROI.

Identify Future Shortcomings 

Cash flow forecasting is much more than just knowing how much you have left in the bank. It can include all your future expenses, including upcoming payments, bills, and when your business can be expected to experience a little turbulence in its profitability.

Knowing you have enough cash available to manage your needs can bring a peace of mind and eliminates the day-to-day stress of firefighting short-term cash needs. Through proactive cash flow forecasting, you are able to identify and prevent significant cash shortages before they become a problem.

How To Generate A Cash Flow Forecast?

Through Microsoft Excel

If you’re going to the route of manually creating your forecasts, then using old-school (yet still purposeful) programs such as Microsoft Excel can be a way to get up close and personal with your financial data. Just use a pre-installed template available in the software and forecast your cash flow efficiently.

  • . But a forewarning, if you’re going to be depending upon this method permanently, then it’s best you be cautious every time you put sensitive financial information into it as this method can result in a lot of human errors.

Through An Accounting Software 

There is no shortage of accounting software programs for accounting and bookkeeping available on the Internet, and most of them will provide you with a vast array of useful options to quickly generate your cash flow projections. But while they are generally easy to use, their projections aren’t what we would call the most accurate or reliable. They’re only suitable to be used as last-minute measures and are not recommended for informed business decision-making.

By Outsourcing To A Financial Management Service

Having a clear idea of your business’s financial health is essential for any entrepreneur. If you do not have an in-house accountant to provide the cash flow for you, then outsourcing your forecasting needs to online financial management services such as Monily can also be really helpful. WHY is this better than the other two options? The accountant will work closely with the business owner to design cash management and cash flow projection tool custom-tailored for the business taking into account the industry-specific variables, needs, and nuances. Our accountants not only create tools and graphical representations in an easy-to-understand format but also provide detailed analysis and identify key action items for optimal cash management based on the report.

See Also: How to Read and Understand the Balance Sheet

Some Important Things To Remember

  • A cash flow forecast will also reflect your estimated operating costs. So, when you are forecasting, it is essential to remember that these are still projections and are vulnerable to any adjustments or unanticipated cash inflow or outflow. The cash flow report will need to be revised if any new information has come up that impacts the payables and receivables.
  • . Your cash flow forecast can also be used to properly plan out your expenses for months where you will be experiencing slow growth and provides you with a clear idea of how much revenue you will have to set aside in order to cover the expenses of these months.
  • . More often than not, companies create difficulties for themselves by generating cash flow forecasts that are a tad bit too complicated to be understood by the business owners. So, it is necessary to create forecasts that are more user-friendly and can provide extensive financial insights by viewing them at a glance.

Final Words

In simple terms, cash flow forecasting gives you useful insights you need to make informed financial decisions such as: will you be able to pay your vendors on time? Or will you have to delay somebody’s payment? A cash flow highlights any cash shortages and enables you to proactively address the situation before it becomes a crisis.

Author Bio

Farwah is the Product Owner of Monily. She has an MBA from Alliance Manchester Business School, UK. She is passionate about helping businesses overcome challenges that hamper their growth, which is why she is working at Monily to facilitate entrepreneurs to efficiently manage business finances and stay focused on growth.