Cash Flow Forecasting: Why It’s Important and How Your Bookkeeper Can Help

Knowing your business inside and out is essential to continue being successful.

You likely already know what to expect in future profits and losses, as well as the margin you will make on the products and services you provide, but do you know how and when changes to your sales and business costs will affect your cash flow? 

If you want to get a good picture of where your company’s financial standing will be in the future, creating a cash flow forecast is the way to do it. 

What Is Cash Flow Forecasting? 

A cash flow forecast is simply a document that projects how much money your business expects to bring in and how much money you expect to pay out at any given time. 

Your cash flow forecast may include planning elements like:  

  • Incoming cash
  • Client payment terms
  • Where cash is being spent; and 
  • Loan and Equity payments

Although the document covers a specific time frame, typically a year with month-to-month updates, you can even create a monthly or even weekly cash flow forecast. The time frame of your cash flow report depends on your cash reserve. Now, let’s look at each element in your cash flow forecast and see what you should include in it: 

Incoming Cash

How much money are you bringing into your business? Look at your past sales performances to understand the volume, trends, and flow during specific times and how they’ve changed over time. 

Client Payment Terms

Clients often pay thirty days or more after a sale has been complete — so just because you’ve made a sale, it doesn’t mean the cash is immediately available for you to use. 

When creating your cash flow forecast, you also need to consider collection frequency. If several payments from clients are historically late, you should account for that in your forecast. 

Where Is Cash Being Spent?

When creating your cash flow forecast, you’ll need to account for what your company spends — both fixed expenses and variable expenses.

Fixed expenses are: 

  • Rent
  • Employee Salaries
  • Insurance, and
  • Loan payments 

Variable expenses include: 

  • Utilities 
  • Repairs and Maintenance 
  • Advertising costs
  • And more

To determine where you’ll spend your cash, you’ll need to look at your past expenditures. Consider things like: 

  • Where did you spend the most money on unexpected expenses?
  • When did your utility bills fluctuate the most? 
  • Was there a time of year when you find yourself needing more employees? 
  • Did you use temporary help or subcontractors?
  • Were these additional expenses tied to revenue?

What Are the Benefits of A Cash Flow Forecast?

Cash flows ensure that your business is sustainable, and they help prepare for the future. They are a fundamental aspect that business owners often overlook. 

It’s an accurate determinant of what cash you will generate and what money you will spend on business operations.  They are the key to making future financial decisions. 

Cash flow forecasts are critical to the survival, profitability, and scaling of a business. 

Cash flow forecasts give you a clear picture of where your business stands. Are you in a position to meet financial obligations? Do you have room to expand? Let’s look at just a few ways a cash flow forecast can help your business. 

Anticipate Cash Shortages

Spotting shortfalls before they happen can help business owners figure out how and when to take action. 

Cash flow forecasting can help your business succeed by knowing when it might be a good idea to have some extra cash in the bank to help your business get through those tough times. 

Not seeing any shortages in the future? Now is a great time to consider how you’ll invest your cash. Will you develop a new product? Invest in new equipment? Hire a new employee? Something else?

Preparing For Growth

Let’s say you have a growth strategy and something changes. By taking an in-depth look at your business finances, you can decide whether you should take advantage of a growth opportunity or if you should re-forecast and pursue a different option. 

Establish long-term and short-term goals for your company. Where will you be in five years? Ten years? An up-to-date cash flow can help you make decisions that help you meet your business goals, or take a step back and reevaluate if a goal isn’t realistic. 

Providing Business Insights

What does your business financial health look like? Where is your business headed? Investors want to see market trends, past performance and know where your business is heading before investing.

Automated Accounting Can Help You Plan For the Future

Financial forecasts are one of the most effective planning tools. It can tell you about the influxes and outflows that will affect the cash you have on hand. Without a financial forecast, your business can’t make accurate business decisions. 

The downside is that creating a cash flow forecast yourself, on top of dealing with everyday business needs, can be a tedious task that is all too easy to push to the back burner month after month. 

That’s where my team and I come in. We understand that cash flow forecasting is one of the most important tools to plan for your business’s future. Let us review your books and discuss how we can help you prepare for the future through cash flow forecasts. Ready to take your business to the next level? Schedule a call today.