What Is A Cash Flow Forecast And Why Is It Important To Businesses?
As a business owner, you need to be aware of exactly how your business is performing at any given point in time. After all, you never know what is around the corner and you need to be able to plan for every eventuality. Wouldn’t it be great if there was a way to know how your business will perform over the next 12 months, so that you can plan ahead?
Cash flow forecasting enables business owners to see a future prediction of how their business will perform. But what is a cash flow forecast and how can you get started with cash flow forecasting in your business?
In this article, we’ll explain everything you need to know about cash flow forecasting, from why it’s important to how you can create your own cash flow forecast for your business.
Cash flow forecasts defined
If you’re running a business, you can’t underestimate the importance of cash flow forecasting. A cash flow forecast is an important way of working out how much money your business will have coming in and going out over time. This makes cash flow forecasting one of the most valuable accounting tools in planning for your business’ future.
But why is cash flow forecasting so important, and how can you get started with cash flow forecasting for your business? Read on to find out.
What is cash flow?
Simply put, cash flow is the movement of money in and out of an organisation, over a specific period. This includes business income, such as your sales revenue and loan advances, as well as your expenditure such as employee wages and loan repayments.
When we’re talking about cash flow, you might hear business income referred to as cash inflow – money that is coming into the business. Meanwhile, business expenditure is called cash outflow – money that is flowing out of the business.
Why is cash flow so important to a business?
So, why is cash flow so important to a business?
There’s no hiding from the fact that every business relies on money to operate. Whatever industry you operate in, you will require money to keep your business alive. As cash flow is your business’ livelihood, it’s not hard to see why it’s so important.
It’s through this cash flow that the business’ expenses, wages and bills are paid, enabling you to continue trading throughout the year. A healthy cash flow will help your business to grow because you’ll have the money to spend on promotional activity, developing new products or investing in staff – and these things are key to the continued growth and profitability of your business.
What is meant by cash flow forecasting?
Cash flow forecasting is the act of predicting what cash inflows and outflows will be at particular points in the future. For example, you may forecast that your business will make £200,000 profit in next year, but it could alternatively suffer a loss of £50,000. You can use this information to predict whether or not you’ll be able to pay your bills.
Cash flow forecasts are often used by businesses to determine whether they should take out a loan, or if investment is available. Forecasting cash flow can be relatively simple if you have a steady business with few fluctuations in income. However, it can become more complex as your business struggles through seasonal highs and lows.
A business can create a cash flow forecast on their own, using the data they already have available such as invoices and receipts. However, if you need help with creating a cash flow forecast it’s always best to ask an expert like an accountant or bookkeeper who can guide you through the process and make sure all your figures add up correctly.
What does a cash flow forecast include?
So, you’ve decided to create a cash flow forecast for your business, but what exactly should a cash flow forecast include? Let’s take a look.
There are two main categories of data that your cash flow forecast should include. These are cash inflows (that’s money coming into your business) and cash outflows (money that is paid out of the business).
Cash inflows include invoices that are due to be paid to the business, expected revenue from sales, investments, loan advances and any upcoming sales of company assets.
Cash outflows include invoices that are due to be paid by your business, employee wages that will be due within the timeframe, the operating expenses of the business and any loan payments that are due.
How do you do a cash flow forecast?
Creating a cash flow forecast is something should be completed at the beginning of every financial year. This process will help to establish whether or not there are any big changes coming up which could affect your company’s finances, such as an increase in business expenditure or income.
It can take some time and effort to create an accurate cash flow forecast, but the benefits will far outweigh this effort. Let’s take a look at the process of creating a cash flow forecast for your business.
First of all, you’ll need to make an estimate about how much money you expect your business to bring in over the next 12 months. You’ll need to consider your estimated sales revenue during this period, any unpaid invoices that are due to be received and any loan advances that you expect to receive.
Then, you’ll need to make an estimate about how much money your company will spend within the next 12 months. Here, you’ll need to consider any business expenses, loan payments and employee wages.
Once you’ve got these figures, enter them into your cash flow spreadsheet. You can then subtract your cash outflow from your cash inflow.
If your income exceeds your expenditure, you’ll end up with a positive number, which indicates that your business is expected to be profitable. If your expenditure exceeds your income, your business will make a loss. If this is the case, it’s worth reviewing your planned expenditure to explore whether there is anywhere that you can make cuts in your spending.
What is the main goal of cash flow forecasting?
The world of business can feel uncertain at times. If you feel like the cash flow of your business is unpredictable, it could be worth creating a cash flow forecast to help you to understand how your business is likely to perform over the next financial year.
The main goal of cash flow forecasting is to discover whether your business is expected to be profitable over the next 12 months. It will provide a list of the positive and negative changes that are expected to occur within your company, as well as providing a prediction of which way your business is heading.
In addition to predicting the financial future of your organisation, cash flow forecast will also help you monitor spending habits and improve efficiency. This means that it can be an invaluable tool for small businesses looking to improve the management of their money.
Why is cash flow forecasting important?
Understanding your future cash flow should be a priority for any business that wants to succeed. Not only will it help you to understand the direction of your business, but it will also help you to prepare for the future of your business, as well as enabling you to make informed business decisions.
At its foundation, cash flow forecasting helps you to predict whether or not your business is likely to be profitable. This can help you to plan for any unforeseen expenses and make better use of any excess cash that your business might have. Not only that, but cash flow forecasting can help you to manage financial risk more effectively, ensuring the future success of your business.
Why is cash flow forecasting difficult?
Many business owners find it challenging to forecast their future cash flow. If you are struggling, you are not alone – this is a common challenge for business owners. Let’s take a look at some of the biggest challenges of cashf low forecasting for business owners.
Firstly, cash flow forecasting takes time – something that many business owners are short of. When there’s a choice to be made between business activity that results in direct profit and a data collection activity, it can be tempting to choose other things over cash flow forecasting.