Sat Dec 26, 2020 | | Bookkeeping Services, Business, Cash Management, Financial Controller Services

Tips for Successful Cash Flow Forecasting


cash flow forecasting

In the U.S., the survival rate for small businesses is bleak, with 20% going under in the first year and 50% failing after five years. These businesses shut down for various reasons, including lack of customers for the product or service or having difficulty hiring the right people. But insufficient cash flow is frequently the reason for these closures.

Cash flow forecasting, or accurately predicting your company’s incoming and outgoing funds, can help give your business a fighting chance.

Without a crystal ball, how can you achieve reliable cash flow forecasts? With the help of a qualified professional, a balance sheet, an income statement, your financial records, and knowledge of your business, you can forecast cash flow and help put your business in a position to succeed.

Types of Cash Flow Forecasting

As you begin the cash flow forecasting process, you’ll hear about two methods: the direct and indirect methods.

The direct method focuses on short-term cash flow, often for a period of three months or less. It will illustrate how much cash you’ll need to fund working capital and will examine upcoming income and payments.

The indirect method is a look at the long-term with a focus on income statements and balance sheets. This model will highlight the resources you’ll need for long-term company growth and capital projects. The process will be more in-depth, with a focus on balance sheets and adjusted net income.

You may be able to use both forecasting methods for your company, depending on the results you hope to achieve.

Cash Flow Forecasting Tips

A one-size-fits-all solution that will meet every business’s cash forecasting needs does not exist.  Your cash forecasts will differ based on your industry and your company goals. Read on to learn some tips that can help you get the process moving in the right direction. 

Communication is Key

When it comes to cash flows, it’s not all about the income statement and balance sheet. Effective communication is essential to a successful cash flow forecast process. Unless your company is a one-person show, an accurate forecast will depend on information, input, and insights from key people in your organization.

You’ve heard the phrase, “Garbage in, garbage out?” That’s particularly true for cash flow forecasting. Without necessary and correct details from your team about their individual or division’s activities, you’ll end up with an inaccurate forecast and poor decisions as a result.

If you make sure your finance management team and other people in your company understand both the need for cash forecasting and the process, you’ll take your first steps to avert a cash flow crisis.

Remember That Cash Flow and Revenue Are NOT the Same

Both cash flow and revenue are part of a business’s financial wellness, but they are not the same.

Revenue is an indicator of sales and marketing success. It’s solely focused on the money coming into your business from customer sales or services. Revenue is a one-way street.

Cash flows, on the other hand, involve money management or liquidity. Cash flow is a two-way street that takes into account money coming into your business as well as cash output. It includes revenue, but also loans, investments, and business expenses like bills and taxes.

Your cash flow statement may be positive or negative at different points in time, but for your business to succeed, you need adequate cash to cover your current financial responsibilities.

Cash Flows In, Cash Flows Out

Your cash flow forecast will depend on more than an online article about cash flow, a bank account statement, or an Excel spreadsheet. Forecasting is based on a detailed prediction of cash coming in vs. cash outflows. You’ll need to identify a certain period of time and predict potential income sources and expenses.

You will want to look at things like:

  •     Past sales figures
  •     Consumer confidence and spending
  •     Vendor contracts and relationships
  •     Software license fees
  •     Billing and remittance patterns
  •     Operating expenses like employee pay, rent, taxes, and utilities

Remember to consider price changes, new product lines, and salary increases. Both fixed and variable costs will impact your cash flow forecast. Don’t forget to include any one-time expenses like new equipment, unforeseen activities, or professional development initiatives for your staff. If your business runs on tight margins, any missed figures can significantly affect the accuracy of the cash flow forecasting process. By involving key stakeholders in your organization, you’ll be more likely to get a complete cash flow picture.

Consider Multiple Versions of Your Forecast

No one can see into the future, but companies often get hints of things to come in their industry. If you’ve read articles or heard the buzz about a game-changer in your industry — either positive or negative — you should create multiple versions of your cash flow forecast.

For example: Let’s say you’ve heard rumors about a huge addition to a product line. It may happen this year; it may not. Take both assumptions into account. One model should include more sales with the new products, while one should not (in case the additions don’t roll out until the following year). This will allow your business to respond and adapt quickly to different conditions, maintaining a positive cash position.

Be Open to Change

Even the most thorough and accurate cash flow forecast will not be 100% spot-on. You may have an unexpected and unavoidable expense. A reliable customer may experience a setback of their own, changing their business patterns you have depended upon. A certain sale may not be such a sure thing after all.

The point is that, once you finish your cash forecast, you need to commit to regular monitoring of cash flow statement results and adjusting the forecast as needed.

You know your business and its operating activities better than anyone, so as you work through the process, you should decide how much variance you can afford. That allows room for the unexpected on your path to accurate cash flow forecasting.

Call a Cash Flow Professional You Can Trust

You can take time away from daily operating activities, delve into sales, examine your accounts, read a ton of articles, and buy pricey software–and still find cash flow forecasting challenging. If you’re concerned about your company’s cash flows, it’s a sure sign you need a financial expert.

At CFO Strategies, we have a talented team of finance professionals who have the expertise to help companies like yours navigate the complex cash flow forecasting process.

We will build and maintain a forecast with your company’s goals in mind so that you’ll know what you need to set your business on a successful path to a positive cash balance.

Located in Central New Jersey with senior professionals in multiple states, CFO Strategies serves a variety of industries. In addition to cash management and cash flow forecasting tools, we offer CFO, controller, and accounting and financial reporting services either on-site at your business or virtually from anywhere.

Our team has extensive financial expertise and a reputation for satisfied customers. Contact us today at 732-236-4454.