What To Do With Cash Flow Forecasting

Written by Amanda Bower    |    Published: September 12, 2023

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Cash flow is vital for the sustainability of any business, and with careful attention, it can greatly contribute to your financial health. Keeping a close eye on your cash flow is absolutely crucial for your business’s survival. By diligently monitoring your incoming and outgoing funds, you’re positioning yourself for financial stability and success.

Cash flow forecasting is the name of the game if you want to avoid disaster and impress investors. With the right predictions, you can take charge of your finances and watch as your business thrives. Not only that but having a solid understanding of your cash position can help you make killer investments and expansion plans.

You’ll be able to launch new products and services at the optimal moment and take your business to the next level. So don’t wait around—get your cash flow forecasting strategies in place today and secure your financial future. Let’s get started!

What Exactly Is Cash Flow Forecasting?

Cash flow forecasting is a critical aspect of managing finances for startups. With limited financial resources and revenue generation on the line, cash flow can quickly become a nightmare that even the brightest minds can’t solve. Shockingly, 44% of startups fail because they run out of cash. 

Therefore, cash flow analysis is an amazing tool to combat these problems and keep startups from going down in flames. It’s a process that estimates the amount of cash moving in and out of a business over a set period of time, taking into account historical data, market trends, and anticipated future activities. This tool allows startups to take control of their cash flow like a boss.

How Does it Differ From General Forecasting?

As a leader in your startup, you might know a bit about financial forecasting. It’s important to understand that cash flow forecasting is distinct from general financial forecasting, and both serve crucial purposes. 

General financial forecasting is the crystal ball that predicts your company’s financial future. It analyzes historical data and makes projections for different business functions such as sales, inventory production levels, market demand, and more. 

But let’s get real–what really matters is the cash flow. Cash flow forecasting is the money magician focusing solely on cash flow—how cash moves in and out of your company. It’s the tool to identify potential cash gaps and surpluses and make decisions leading to favorable cash conditions.

How to Forecast Cash Flow

Cash flow forecasting is the process of predicting how cash will flow through your business and when. But to arrive at these predictions, leaders need to execute a cash flow forecast. 

Here are the steps to creating one.

Start With Your Historical Data

To effectively forecast cash flow, it’s important to gather comprehensive historical data. This includes analyzing financial statements, bank statements, business books, and cash flow records for trends, seasonal fluctuations, and any unexpected irregularities. 

By diligently reviewing this information, you can make informed decisions and take strategic actions to maximize your financial gains. It may seem daunting, but with a little effort and focus, you can make significant strides toward achieving your financial goals.

Pinpoint Your Cash Flow Sources

It’s important to have a clear understanding of where your money is coming from and where it’s going. There are various sources of cash inflow, such as sales, grants, investments, and licensing fees. Still, it’s also crucial to consider the sources of cash outflow, such as rent, salaries, marketing, and raw material costs. 

To better understand your cash flow, it may be helpful to categorize your sources of income. Consider breaking it down into sales revenue, customer payments, supplier payments, loan repayments, and investments. By doing so, you’ll see a clearer picture of where your money is coming from and going and make informed decisions about your finances.

Project Your Cash Inflows

In order to accurately estimate cash inflows, you’ll need to consider both sales and non-sales revenue. Cash inflows can include revenue from sales, and you can use historical sales data and industry trends to predict these future figures. 

But cash inflows aren’t only limited to revenue. Other cash inflow sources include loans, investments, grants, rebates, or licensing/royalty payments. 

Forecast Your Cash Outflows

Identifying and estimating cash outflows (and their timing) is another key part of cash flow forecasting. Your cash outflows might include expenses like rent, salaries, taxes, marketing costs, product launches, and loan repayments. You should also account for one-time and surprise events like replacement equipment purchases or unexpected windfalls. 

Combine Your Estimates

Cash flow forecasting is not just about the amount of cash: it’s about the timing of the cash movements. You need to cross-reference your projections for cash inflows and outflows to see how your cash will perform during certain periods of time.

You should also determine cash inflow and outflow timelines. When can you expect to receive payments from customers? What are their payment patterns like? When are your bills to your lenders due?

Review and Check Your Estimate

As a company moves through the various stages of the cash flow forecast, it’s crucial for leaders to keep a close eye on their estimates and compare them to the actual cash flow. This way, they can catch any discrepancies early on and make the necessary adjustments to ensure the company ends up in a financially stable position down the line.

The Benefits of a Cash Flow Forecasting Strategy

Building a detailed cash flow forecasting strategy can benefit startups and other fast-growing businesses. Here are some of the main reasons why.

You Can Proactively (and Expertly) Manage Cash Flow

One of the biggest and most significant benefits of cash flow forecasting is that it gives business leaders unparalleled tools and resources for proactively managing their finances. Instead of simply reacting to cash flow problems when they pop up, these forecasts can allow leaders to anticipate and prepare for cash shortfalls and surpluses. These insights also allow them to take corrective action as early as possible.

You’ll Better Understand Cash Flow Patterns

Cash flow forecasts give leaders comprehensive insights into where exactly their cash is going over time. Understanding cash flow patterns can help you prepare for things like seasonal dips and prepare well in advance by building up reserves or securing additional funding.

You’ll Have Better Visibility (and Control) Over Your Cash

Cash flow forecasts give you a 360-degree view of where your cash is actually going, where it’s coming from, and the timing of it all. This visibility can give you better control over your financial resources. You can track your cash flow in real-time to make informed decisions based on the most accurate and up-to-date information. 

You’ll Catch Shortfalls Before They Happen

Running out of cash can be a nightmare for startups. Even though it can take years to turn a profit, you can steer clear of cash woes with some solid cash flow forecasting. By keeping an eye on your projections, you’ll be able to spot any potential cash shortfalls and either take action to mitigate the risks or hustle to find cash to fill the gaps.

You’ll Make Better Financial Decisions

Well-informed financial decisions rely on cash flow forecasting. For example, if you’re looking to pursue new business opportunities, expand your operations, or invest your capital, you’ll need to reference your cash flow forecasts to do so wisely.

Cash flow forecasts also help you plan for the future. You can assess your growth plans, acquire new assets, and launch new initiatives when you have an excellent handle on your cash flow. Ultimately, cash flow forecasts allow you to align your business decisions with the cash resources that you’ll actually have on hand. 

Your Stakeholders Will Thank You 

Creditors, investors, and lenders all care about your business’s cash flow, and a well-executed cash flow strategy can help enhance your business’ credibility with external stakeholders. Whether seeking funding or looking for your next big angel investor, a reliable cash flow forecast shows that your business is in good financial health.

Cash Flow Forecasting Is a Critical Component of Any Robust Accounting System

Your company’s financial future is on the line, and cash flow forecasting is the only way to stay ahead of the game. With the power to predict how cash will move in and out of your company, you can take control of your financial destiny. 

Don’t wait for shortfalls or surpluses to slip through your fingers. Make bold decisions that will drive your company to new heights of success.

If you’re looking for financial reporting and analysis to help your organization plan ahead, then we’ve got you covered. Our financial reporting and analysis services provide financial predictions designed to allow decision-makers to formulate realistic and effective strategies like never before.

Contact us today to get started.

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