Businesses have a lot of money going in and out of their business daily. If you’re not already using a cash flow forecasting model, you may be making decisions based on cash that you thought you had versus what’s really in your account.
What Is Cash Flow Forecasting?
Businesses know their profits and losses, but they often miss the middle when too much money is going out of a company or they have excess cash. Cash flow takes all of the cash generated and subtracts operating expenses from it.
For example, let’s assume that you make $100,000 in sales in a single day.
Do you have $100,000? No. Why?
- $25,000 is tied up in invoices yet to be paid
- $75,000 was cash
- $35,000 was used to make the product
- $10,000 covers utilities, etc.
Small changes in profit margins or cost increases often go overlooked if a business has the cash to keep the lights on. However, cash flow paints the true financial picture of the company.
If you have $1 million in sales and $1 million in expenses, you’re not making any money.
Cash flow forecasting empowers business owners to know how much liquid capital they have at any given time to make smarter business decisions. For larger operations, when money is going in and out of a business in large sums, forecasting is crucial to ensure you’ll have money to make smart business decisions.
Why Is Cash Flow Forecasting As Important As Your Budget?
Cash flow is crucial when creating a budget for a business because if:
- You budget too high and don’t have cash. In this case, you’re losing money and running on negative cash flow.
- You have excess cash flow that can be added to your budget.
When you have too little cash flow, you may need to cut items from your budget. However, when you have a surplus, you have the freedom to add new employees to your budget, acquire new businesses or expand into new markets.
Cash flow can help you make the right budgeting decisions now and in the future.
How long should your forecast look into the future? Let’s take a look.
How Far Should A Cash Flow Forecast Look Ahead?
A consolidated cash flow statement can be for a time period that your business prefers. In many cases, cash comes in and out of a business in what’s known as the “cash cycle.” The cash cycle lasts 13 weeks, and most companies will run a 13-week cash flow forecast.
It’s also no coincidence that the 13-week period is the length of each quarter.
However, the 13-week cycle is just one of the many ways to predict cash flow. You’ll also find many cash flow software options that will generate statements:
- Six months
You can run a forecast for the period that works best for your business. If you operate a small business or startup and want to better manage your capital, begin forecasting daily. In times past, when all of the calculations were manual, daily cash flow statements were impractical because they were resource-intensive.
However, the software allows businesses to generate cash flow statements daily or in real-time, helping owners and finance teams fully understand the business’s cash position.
Who Should Be Responsible For Cash Flow Forecasting?
The benefits of cash flow forecasting cannot be understated. If you’re not using daily cash flow forecasting already, you may be wondering who should be in charge of the forecasts? Ideally, your finance team should be in charge of forecasting.
You may rely on the following experts to run your forecasts:
- Financial controller
- Finance manager
If you run a small business and want to benefit from the importance of cash flow forecasting, you’ll often work with an accountant, or the owner may generate your forecasts. The software makes it fast and easy for businesses to forecast cash flow.
Finance teams are often in charge of cash flow forecasts because they use this crucial information to help you make smart business decisions.
If you’re not running cash flow statements yet, you’re putting your business’s future at risk. Cash flow is your company’s lifeline, and you can use it to buy equipment, pay bills or know when it’s time to take out additional financing.