A solid financial foundation is important for a business. Once you run out of cash, the game is over. Around 82% of business failures are due to cash flow problems according to a U.S. Bank survey. Poor cash flow management highly contributes to the failure of business especially start-ups and small businesses.
What is a cash flow forecast?
Cash flow forecasting is a plan or estimate of a company’s future financial management for a company’s existence and growth. Cash Flow forecasting is a basic planning component for safe financial management. It projects the future financial position of a business based on how much money will be flowing in and flowing out of your business for a fixed period. Cash flows into the business through sales, loans, and investments. Cash flows out of the business (means spending money) through expenses on services and supplies like taxes, loan payments, bills, rent or mortgage, etc. This means that every penny passing through the business be it any reason should be included in the cash flow forecast.
Usually, a Cash flow forecast can be measured monthly or weekly. If the financial condition of the business is safe and secure, then monthly forecasting is enough. But if the financial state is tight and fluctuate every week then weekly forecasting is recommended. In the worst case, if the financial condition is critical, then daily forecasting is vital.
Advantages of Cash Flow Forecast
Let’s check some of the advantages of Cash Flow Forecast:
- It keeps an eye on the company’s earnings.
The cash flow forecast provides you with a way to look into the company’s finances. It assists with managing liquidity in an organization and ensuring that necessary liquid funds are available for the business needs. This avoids funding issues and establishes better management of funds.
- Forecast any cash shortages
Cash shortages can be bothersome. As the saying goes, cash is king. Before the cash shortage materializes, it is important to take the necessary measures to curb it. Cash Flow forecasting allows you to bounce back before you hit shortages. This is done by cutting off some not so important expenses, cutting down some costs; hold any updates for equipment, etc.
- The cash flow forecast helps take the right decision at the right time.
The cash flow forecast helps the organizer to analyze the present situation from the detailed report provided. This particular report helps the organizer to take the right decision at the right time. This method helps him to attain profit or helps to restrain him from suffering a loss.
- This cash flow forecast helps to maintain a sound relationship.
An important part of every business is to maintain a good relationship between their customers and suppliers. This cash flow forecast helps the organizer to identify the customers or suppliers who support him to gain profit. By this method, we can maintain a good relationship with these customers or suppliers. This relationship makes them more loyal to us and helps to increase their performance.
- It is considered as a powerful method in these categories.
Unlike other methods used in the field of finances and accounting, the flow forecasting is considered more powerful and accurate. With the help of this cash flow forecast, even a beginner can go through the chart and be able to analyze the current financial status of his/ her organization.
- The cash flow forecast helps to maintain cash gaps.
The period between business payment by an organization and the service bought is known as cash gaps. By using this cash flow forecast, we can calculate this cash gap earlier and plan according to that. We need to arrange extra financial backup to overcome this cash gap by taking bank overdraft or any such financial alternatives.
- Helps to handle surplus cash
The surplus cash is the excess amount of cash in the account of the organization after a particular business deal. This forecast will provide the details regarding this surplus cash, which helps the organizer to reinvest this cash in the new marketing field to attain an extra profit.
- Monitors the expenditure of the organization
Every business organization has its business targets. The cash flow forecast helps the organizer to calculate exactly when they will reach their target. This method of forecasting will help you to identify the Pros and Cons of your financial budgets. By measuring the cash flow in and out of your business will help you to set new targets, and increase the precision of upcoming budgets.
- The cash flow forecast helps in decision making
This method helps an organizer to monitor every data regarding the economic or the financial status of the organization. By analyzing this data, he can make his decisions for the betterment of his organization.
- Improves investors confidences
Investors are the most essential part of an organization. So their confidence in your business is very significant. To gain this confidence we need to work hard on the financial and economic conditions. The cash flow forecast will give the exact value for income and expenditure. This type of well-organized budget will increase the confidence level of the investors and it will directly affect the growth of the organization.
- Easy way to submit tax documents
While leading an organization you should have to follow certain rules and regulations put forward by the government. You should have to set up a proper budget for easy tax payments like sales tax / VAT. This cash flow forecast will provide you with exact details regarding your income and expenditure. We can depend on this forecast because it provides exact and transparent data collected at a regular interval of time (quarterly or monthly).
How can we create a cash flow forecast?
- You should create income and sales for your business.
- Fix an estimate on cash inflow.
- Fix an estimate on cash outflow and expenses.
- By evaluating all gathered pieces of information, we can create a cash flow forecast.
Preparing a cash flow forecasting is an important part of every organization. It provides complete details regarding your organization in the form of a flow chart. The expenditure for preparing this cash flow forecast is cheaper when compared to an actual loss suffered due to a lack of planning.