As a business owner, it is not enough to track your company’s finances by looking at the balance sheet or income statement. It is equally important to have an understanding of cash flow forecasting to help you make informed decisions and plan for the long-term future of your organization.
In essence, cash flow forecasting is the process of estimating how much cash a business will have at its disposal within a future period. This process is important because it gives business owners the ability to anticipate potential cash shortages and take appropriate measures to avoid them. Conversely, cash flow forecasting may also allow you to plan for growth and expansion by anticipating surpluses of cash.
By creating a cash flow forecast, a business can pinpoint the specific factors that impact their income stream and costs. This detailed information can then be used by a business owner to make strategic decisions that promote financial stability and growth.
To create a cash flow forecast, you will need to keep track of your business’s expected income sources and the expenses associated with running your organization. An ideal way to start is by creating a cash flow budget that includes all of your anticipated income and expenses for a given time period. Some of the parameters that should be considered for your cash flow forecast include:
• Receivables and expected inflows: Any money that is owed to your company that you are expected to receive during the forecast period.
• Payables and expected outflows: This includes all expenses that your business incurs, including operating expenses, salaries, rent, vendor payments, and taxes.
• Timing of expected cash flows: The forecast should take into account the actual timing of cash inflows and outflows.
• Contingencies: Business owners should evaluate situations that could potentially arise and require additional cash e.g. natural disasters or market downturns.
Once you have put together a comprehensive cash flow forecast, you can use this information to make informed decisions. For example, a negative cash flow forecast may indicate that your company needs to reduce expenses or find ways to generate additional income. Conversely, a positive cash flow forecast could allow your business to make investments or expand.
Cash flow forecasting is an essential tool for any business that wants to achieve long-term financial success. By regularly reviewing your cash flow forecast, and using it to make informed decisions, business owners can ensure their company stays on track to meet their financial goals and objectives.