Even for the uninitiated, cash flow forecasting is quite a straightforward concept. It can be as simple as adding up the money coming in and totalling the expenses going out. There are various ways to go about the actual process of managing your cash flow – from complex accounting systems to straightforward build-it yourself spreadsheets. For details of the information you might want to track, read our blog How to Avoid a Cash Flow Crisis
We believe that if you’re going to invest time in forecasting your cash flow, it’s important to make sure you make the most of the valuable tool you’re creating. Have you considered what you’re going to do with the numbers once you’ve got them? Ongoing use of your cash flow forecast not only justifies the time you invest in creating it; it will also help you to focus on keeping it up to date, realistic and simple. Here are five ways to make the most of your cash flow forecast.
Take control of your variable costs
Creating a forecast that gives you visibility of your cash flow should also give you the information you need to take control of your spending. Your awareness of your income will allow you to track when you’re going to have money in the bank and when you’re not. It will also map out your expected expenses, which will be a combination of fixed and variable costs, and will probably vary from month to month.
Your cash flow forecast will allow you to plan the best time to make any payments or purchases in order to avoid going into the red or conflicting with other financial commitments. If you’re struggling to afford a purchase then you can choose to postpone it until your cash flow is healthier, or if it has to happen you can consider your finance options. Maintaining a strong awareness of your cash flow forecast will allow you to closely plan any expenditure and proactively manage your funds.
Be proactive with cash shortfalls
In an ideal world a review of your cash flow forecast would show your company is in a strong cash position for 12 months of the year. But unfortunately there are few businesses who have that luxury. Your income and expenses may fluctuate from month to month, and amongst this variation you may identify times when the income required to sustain your business is not available. This could be especially applicable if your business is growing and you enter a period of investment without immediate returns.
By keeping track of your financial position through your cash flow forecast, you’ll be able to prepare yourself for any shortage and identify solutions to rectify the issue. Reviewing outgoing payment timings or bringing forward the delivery of an order to a customer may be all that is required to rebalance the books. If it’s not possible to make internal changes to generate the cash you need, it may be time to consider your finance options.
Manage your finance options
If your forecasts have highlighted that your business may require a cash flow boost, then start reviewing your options straightaway. The time you’ve invested in creating the forecast has meant that you should now have ample time to plan ahead and identify the right finance solution for your business. When you’re reviewing your options, its worth running a few scenarios to be sure you can increase or decrease your finance as required if you adjust your forecasts. You should also consider closely matching the duration of your funding to the period of shortfall, so that you can minimise cost by managing a debt for as short a time as possible.
Use your forecast as a performance measure
By managing a cash flow forecast you are creating a valuable tool that can be used to measure your progress and performance as a business. Track any variance in your actual performance against your original forecasts and take the opportunity to celebrate targets that are exceeded and understand missed ones. Benchmarking your cash flow forecast will ensure your future forecasts increase in accuracy as you better understand your performance today.
Build a testing ground for different initiatives
A cash flow forecast is an excellent tool for quantifying the value or cost of ‘What if?’. New ideas can seem intangible and it’s easy to embrace or reject one without an understanding of the impact they could have on the cash flow of your business. Your cash flow forecast is a great test-bed for running different strategies and scenarios, and quantifying the numbers they could generate. It’s not easy making estimates, so err on the side of caution and make your calculations realistic rather than optimistic. By manipulating the numbers in your forecast you can quickly review the impact of changes such as: increasing staff numbers; implementing new products; or exploring new markets.
If you want to plan ahead and prepare your business for the future, then cash flow forecasting is a very valuable investment. Once you’ve inputed your numbers you will be able to better understand where opportunities lie to make the most of your assets, and where you might need to take action to protect your cash position. You will also have the tools you need to be able to consider the financial impact of new scenarios and possibilities, and review your performance in order to celebrate success and learn from mistakes. The power of cash flow forecasting lies in keeping it up to date and then embedding it into the way you do business. Once you’re doing that then you’ll be well on the way to being prepared for anything.
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