Cash flow forecasting: is it worth the effort?

As an accountancy firm, we often advise people about all things financial. The most common question we answer has to be, ‘Are cash flow forecasts worth it?’

Without any doubt, our answer is always YES.

The consequences of not using a cash flow forecast are frightening for sole traders and limited companies. Without a cash flow forecast, you are less likely to:

Make sensible, accurate decisions
Have a concrete knowledge of how your business is performing
Know how you can expand in the future
Set realistic goals and targets for your business
Be able to pay your employees, proprietors, suppliers, and other vital partners within your business
Thrive as a business

Key starting terminology definitions

Before we explore how to produce a cash flow forecast, we must clarify the meaning of a few terms we’ll be using.

Cash flow: The movement of money in and out of a business. It’s a business’s lifeblood, and proper cash flow management is essential to keep a business afloat. There are two types of cash flow: Operational and Investment. Operational cash flow is the money that comes in and out of the business daily. It includes sales, expenses, and inventory. Investment cash flow relates to investments, such as loans, lines of credit, and venture capital.
Cash flow forecast: A finance prediction tool that helps businesses understand where their cash balances will be at specific points. It can also be known as a cash flow statement.
Balance: The amount of money you have in an account.
Variances: The difference between actual and budgeted income and expenditure.
Revenue: The amount of money a company brings in from its sales and other activities. There are two types of revenue: operating and non-operating. Operating revenue is generated from core business activities, such as sales of goods or services. Non-operating revenue comes from sources, such as interest or rental income – Revenue is a crucial metric for investors and analysts to review a company’s financial health and performance.

What period does a cash flow forecast cover?

Cash flows can be designed and used over various periods. For example, as cash flow estimates the amount of money you expect your business to take in and payout, it tends to cover 12 months. However, it can be created for a shorter period, such as a month or even a week.

It depends on the nature of your business and why you are running a cash flow report.

How often should you update your cash flow forecast?

Regularly – at least monthly, and more often if you’re experiencing fluctuations in your business. This will help you identify any potential problems early so you can take steps to mitigate them.

When updating your forecast, make sure to take into account any changes in your expected income and expenditure. If you’re expecting a large influx of cash, for example, from a new contract, make sure to factor this in. Similarly, if you anticipate any significant expenses, such as buying new equipment, include these in your report.

Cash flow forecasting is an essential tool for all businesses – it can help you to avoid financial difficulties and plan for future growth. In addition, you can update your forecast regularly to ensure that your business stays on track.

5 Ways to ensure your cash flow forecast accuracy

So now you understand the importance of a cash flow forecast, you need to grasp how to maintain, manage and use it effectively. Like all critical documents, it’s useless unless used to its maximum potential.

We’ve gathered our top five tips to ensure accuracy, precision, and knowledgeable insight into your cash flow forecast:

Know your historical cash flow: This is the starting point for any cash flow forecast. Knowing how much money has come in and out of your business in the past will give you a better idea of what to expect.
Look at trends: Once you have your historical cash flow data, look for any trends. Are there certain times of the year when cash flow is always low? Does a particular customer or type of sale always result in a large influx of cash? Identifying these trends will help you anticipate changes in your future cash flow.
Make assumptions and adjust as needed: There will always be some uncertainty in any cash flow forecast. Rather than agonising over small details, make assumptions and then change them as needed based on actual results.
Use multiple forecasting methods: There are various ways to forecast cash flow, so it’s helpful to use more than one. This will give you a more accurate picture of what to expect.
Review and revise regularly: Cash flow can change rapidly, so it’s essential to regularly review and edit your forecast. This will help you stay on top of changes and ensure your forecast is as accurate as possible.

Cash flow apps to take a look at

Fluidly

Fluidly is a financial planning and forecasting app that helps small businesses make better decisions about their money. It gives business owners a clear picture of their current financial situation, as well as what their future might look like, so they can plan accordingly. Fluidly is easy to use and provides insightful reports that help users save time.

Float

Float is another application that cleverly and intuitively assists you with your cash flow needs. It works alongside your bookkeeping applications and tools, so everything synchronises in one place. You can also enjoy a free demonstration to get to grips with using float before you commit to a subscription.

We hope that’s helped to put your mind at rest regarding cash flow forecasts, but if it hasn’t, don’t worry – we’re always on hand and here to help. Contact us today.