A cash flow forecast is a handy, if not vital, tool for your business, especially if implemented well. But what exactly is it, and why should you consider incorporating it into your financial toolkit? In this article, we travel through the compelling landscape of cash flow forecasting, uncovering seven compelling reasons why it's a game-changer for your business.
So, grab your favourite beverage, settle into your chair, and get ready to explore how this powerful tool can transform your financial strategy – and reduce your stress.
What are Cash Flow Forecasts?
Many business owners get tripped up by assuming they have good visibility on money in and out based on P&L statements or budget forecasts. But cash flow forecasts are a level up on traditional budget forecasts.
They aim to bridge the gap between your invoiced income and expenses – essentially what your ‘accounting records’ say – and when you physically receive and subsequently spend your cash. Essentially, what goes in and out of your bank accounts.
The result for the management team? An estimate of cash at bank at the end of each forecasted period, which helps with planning and running a smooth operation.
What are the Different Types of Cash Flow Forecasts?
There are several types of cash flow forecasts that can be leveraged to provide confidence in your financial operations, including scenario-based cash flow forecasts, rolling cash flow forecasts, and short and long-term cash flow forecasts.
Your accountant can work with you on the best option for your business, but we find 3-way cash flow forecasts to be the best tool for successful business owners.
What are 3-Way Cash Flow Forecasts?
The ‘Magnum Opus’ of all forecasts, a 3-way cash flow forecast, not only predicts cash at bank from estimates of income and expenses (the traditional forecast) – it also aims to provide an estimate of cash and cash equivalents, together with other indicators of financial health (e.g. future working capital position and debtor days).
A 3-way forecast is a comprehensive financial projection that combines three key financial statements: the income statement, the balance sheet, and the cash flow statement. It provides a holistic view of a business's financial health and future performance, and helps business owners make informed decisions about everything from day-to-day operations to long-term strategic planning.
How Cash Flow Forecasting Helps Your Business
1. Predict significant future cash flow surplus or deficit
By meticulously analysing your income and expenditures, you can proactively identify periods of potential surplus or deficit, enabling you to make informed decisions about investments, savings, or necessary cost-cutting measures. If you’re growing a team, a cash flow forecast can greatly assist on the best timing for recruitment and restructures.
2. Allow timely negotiation of payment terms with stakeholders
If you don’t ask, you don’t get! Cash flow forecasts provide the insight needed to negotiate favorable payment terms with suppliers, clients or lenders. Armed with accurate predictions, you can secure terms that align with your financial capabilities, ensuring smoother operations and better stakeholder relationships.
3. Predict tax and other statutory obligations
Tax season can be a daunting time for business owners. But with a cash flow forecast in place, you gain the ability to anticipate your tax obligations well in advance. This not only prevents financial surprises but also allows you to plan and allocate resources for these inevitable expenses efficiently, avoiding penalties and late fees.
4. Make timely decisions to confidently grow
Want to expand your strategy or take on new projects? A cash flow forecast helps you assess if you've got the financial muscle to make those moves, and the timing to ensure smooth operations along the way.
5. Impress lenders and investors
When seeking finance or investors, or even reporting to existing shareholders, a cash flow forecast not only shows that you have financial acumen and are on the ball but also demonstrates what an investment is likely to shape up like in the future.
6. Manage inventory intelligently
A cash flow forecast can help you to avoid stocking too much or too little, so you can strike the right balance when it comes to inventory costs and maintaining happy customers.
7. Connect business wealth with personal goals
If, like many other business owners, you went into business to create financial freedom for your family, but all you ever seem to do is ‘tip’ money back in, then a cash flow forecast could be the key to unlocking cash, and profit, in your business.
Talk to BlueRock About Managing Your Business Cash Flow
Cash flow forecasts are your go-to guide for better financial planning and smoother business operations. To get started, reach out to one of BlueRock’s business accountants, who can help keep your cash flowing steadily and confidently plan for those times when you know things will be tighter. Reach out to us for a consultation about improving your cash flow , or any other aspect of your business.
