Cash Flow Forecasting: Saving Businesses from Downfall

Cash flow forecasting is a crucial element in corporate planning.

However, several organizations are not fully aware of the breadth of benefits of cash flow projection. Any company that places a lot of emphasis on profit but gives little to no importance to cash flow may find itself failing.

If the projected cash flow statement isn’t made, companies can find themselves in debt. The vendors and suppliers can cut them off if the payment hasn’t been cleared in full. 

SME Loans claim that one in seven small companies run into financial difficulties that prevent them from paying their staff. In the UK, this translates to a staggering 2.2 million individuals who don't get their salary on time.

Cash forecasting is a great tool for strategizing effective goals and making the right decisions. Using a cash flow forecasting model can help manage revenue effectively and give a warning when the company is anticipating a deficiency. This allows the organization to take preventive action.  

In this blog, we will discuss the significance of cash flow forecasting and how data analytics in cash flow can strengthen your revenue and financial status.

What is Cash Flow Projection?

A simple cash flow forecast is an accurate evaluation of the amount of revenue your organization anticipates moving in and out in the given timeline. This incorporates capital assets such as cash and short-term investments.

• The timeline can span from a complete year to an even shorter duration of a week or month, predicting both income and spending.

• Your organization becomes more susceptible to complications in case of economic problems if you just concentrate on earnings and ignore cash flow.

• A wholesome profit at the end of the year isn’t a sign that everything is going to run smoothly. You need to remember that it takes time for income from the sales you make to become accessible. However, your vendors and suppliers won’t wait until the profits are reflected in your account.

This is where cash flow projection helps tremendously. Even if the only data you have are the bills and receipts, it’s enough to create the statement and gain the much-needed clarity.

The Main Goal of the Projected Cash Flow Statement

Now that you understand what cash flow forecasting is, let’s look at the main objectives of working with a cash flow forecasting model.

• One of the biggest goals of making cash flow projections is to help companies manage their liquidity and make sure that they have enough cash on hand to pay their debts.

• With accurate cash flow forecasting, it's simple to make strategic adjustments to guarantee that your company thrives and never inadvertently has no money in the bank.

According to Business News Daily, 61 percent of small firms worldwide, according to the Intuit report, have trouble with cash flow. About one-third of individuals polled can’t pay their debts, creditors, vendors, or workers.

Of course, creating the projected cash flow statement only works accurately if you and your team are completely truthful when creating the budget and tracking your spending. This will help unfortunate problems from emerging.

• One of the greatest blunders you can make is to conceal costs to provide a more positive monetary depiction.

• Sincere disclosure of the company's monetary and budgetary performance is necessary for financial predictions to be useful because that’s what cash flow forecasting intends to resolve.

Here’s a cash flow projection example to give you better clarity on how everything works.

Let’s say your company sales fluctuate throughout the year and in the coming month the team is anticipating a positive cash flow.

• The cash flow forecast formula suggests that your sales will decline in the next month and the cash flow will be negative.

• Now using the knowledge given, you can carry over the positive balance into the following month to assist pay for costs that are not entirely covered by sales income.

• This will enable your company to get through this negative cash flow without any serious or irreversible impact.

Benefits of Cash Flow Forecasting Model

Yes, cash flow forecasting is quite beneficial, and we shall go over its importance by outlining its advantages.

Track your spending

It is important to track and comprehend the consistent company expenses. This can be done by generating a statement of the planned cash outlays over a specific time frame.

Cash flow forecasting will enable your organization to identify domains where there is excessive spending and how cost-cutting can increase the cash flow.

Recognizing the effects of designed strategies and potential results

Cash flow projection is crucial for small businesses. Even a single payment that wasn’t made on time can cause the cash flow to rapidly deteriorate.

However, a vital component of company planning is understanding how different scenarios would affect cash flow. This can be understood by entrepreneurs through sculpting alternative circumstances.

• An organization can have the assurance it requires to successfully implement strategies by utilizing scenario planning to explore many potential situations and results.

• The process of expanding and scaling your organization is always burdened with threats. A cash flow forecast example of how it helps is that the cash projection made can simulate the fiscal complications of different circumstances.

  • These circumstances include providing quick delivery options, introducing a brand-new product category, or spending on expensive equipment.

• It helps in ensuring that your company knows which strategy/plan to execute and which one to reject. You are sure to make a choice that doesn’t compromise long-term financial flow.

Identifying impending cash constraints

The purpose of a cash flow forecast formula is very simple. It determines if, in the near future or within the given timeline, the company will have a beneficial or negative cash flow.

• If the statement shows a gap in the cash flow that can lead to a stressful impact, the organization can take the required action.

  • The actions to reduce cash outflows can include paying vendors via credit, saving extra money for these periods, etc.

• For companies that undergo considerable seasonal revenue changes, this is an especially significant advantage of cash flow forecasting.

A record of overdue payments

Some clients are persistent late payers. This can be quite stressful for small businesses and also hurt large companies as well.

Some clients are persistent late payers. This can be quite stressful for small businesses and also hurt large companies as well. Understanding how these late payments affects the baseline can help in recognizing the necessity of improving credit control.

Improved management of extra cash

Cash projection includes both positive and negative cash flow. While a negative cash flow helps you to work on strategies that will save the company from going through a nerve-wracking period, knowing the positive cash flow can also be quite valuable.

You can have insight into how to manage the surplus cash effectively.

• It's uncommon for most firms to have the extra money in their account. However, employing supplementary funds for debt repayment or investments in different marketplaces might be crucial to staying secure.

• Preparing and planning for the excess cash to be utilized effectively means identifying when and from where the surplus will materialize.

Is the business really growing?

Let’s say your company is doing well. You get new clients and orders every day. However, instead of money flowing in, it’s going out. How is that happening? This is where cash flow forecasting can be a boon.

The reasons could be many. The cash flow imbalance can show up because you are executing plans to be at par with the growing demands. You need to pay rent for the warehouse you acquired two months back to pay the new vendors and employees you had to hire due to the increase in sales, buy new inventory, etc.

Despite the higher revenues, your company may still collapse if the cash flow projection wasn't success oriented.

Spreadsheet vs. software for cash flow forecasting

Cash flow forecasting that is done using cloud-based tools or data insight software, (such as Quick Sight, Tableau & Power BI) makes the process simpler and quicker. The data analytics tools are essential for effective and proactive planning, saving the organization both money and time.

According to Forbes, the old spreadsheet reporting method is still used by 70% of small firms, which is time-consuming and error prone. Depending on AI and ML software that generates precise insights about the direction their organization is going, small businesses can enhance cash flow predictions.

Conclusion

A healthy cash flow is an answer to running a successful business, as it helps in strategizing and planning based on all possible scenarios.

BluEnt provides both basic and sophisticated cash flow forecasting solutions. These data analytics solutions are designed to assist your company in making the best decisions possible with the available information.

You can go through our portfolio to learn more about our data analytics services and data insights solutions.

Ready to initiate a healthy cash flow through cash forecasting? Get in touch with us now!