What Is A Cash Flow Forecast?

A cash flow forecast is essentially a report that shows the amount of money that businesses expect to get and spend during a certain period of time. In other words, it refers to the cash inflow and outflow of a business during a given timeframe. An important part of managing your business is knowing your exact cash flow scenario in the present and future. Although it might be challenging to predict the precise bank balance after a few months, you can still make an educated guess using a cash flow forecast.

This financial forecasting can be done for small businesses either for a year or as a 13 weeks forecast for better liquidity planning. Furthermore, the duration of the forecast differs for all. Larger companies usually prefer longer forecast periods, while smaller companies prefer mixed or shorter forecasts.

Positive Cash Flow & Negative Cash Flow

The very first thing to understand before getting started with cash forecasts is the concept of positive as well as negative cash flow. The former refers to businesses expecting more cash than they spend. This means that a business will have a positive cash flow if it receives more money than it spends. This results in a cash surplus that businesses can use to grow further. On the flip side, if a business expects more spending than income during a certain period of time, it is referred to as a negative cash flow. Hence, all businesses must strive towards a positive cash flow during a given period. This helps businesses maintain good financial health as well as possess all the required resources to take advantage of upcoming opportunities and navigate market downturns.

Reasons You Should Use A Cash Flow Forecast

When it comes to small businesses, a single late payment can mean red flags on their bank account balance. Most businesses do not know their cash balance, and this can lead to trouble in case of emergencies if things go against all plans. By forecasting your cash flow and being proactive, you can know the approximate amount of funds you will require in the future. This type of planning is useful to predict shortages and surpluses of cash so that you have all the information you need to make strategic business decisions. Cash flow planning comes with a host of benefits such as:

• Prepare for seasonal fluctuations more smoothly by using the forecast. It will help you know the precise amount you should set aside during the slower months for all your expenses.
• Understand the impact of planned business changes. In case you plan on acquiring equipment or hiring, you can see the effect immediately on your cash balance.
• Finally, you can spot any shortages well in advance before they pose a problem. This will help you create a safety net for emergencies to cover all unexpected expenses.
• In short, an accurate cash flow forecast can help you understand the overall effect of future plans as well as their possible outcomes.

Importance Of A Cash Flow Forecast

One of the most common accounting problems is poor cash flow management. An American survey conducted on small business failures reports 82% failures due to the absence of or poor understanding of cash flow management. The same situation prevails in the UK.

An easy way to understand cash flow is that it is the heart and soul of any business. When you know the amount of cash that is flowing in and out of your business at all times, you can manage your cash flow better. This makes all the difference when it comes to keeping a business afloat. Cash flow planning is a good idea as it offers you insights into the changes that must be made before it is too late. Cash flow forecasts also allow businesses to know about all potential shortfalls at the right time so that the problem can be rectified before irreversible harm to the business.

Create A Cash Flow Forecast Competently

You can now create a cash flow forecast competently using efficient online accounting software. You can use dedicated platforms such as Futrli or Float to create up-to-date and accurate cash flow forecasts as well as cash flow statements by connecting to your financial data directly.

Need Help?

Target Accounting can help you with the right knowledge and expertise required to manage the cash flow of your business. You can avail of our services to get an initial cash forecast for your business. We also assist you in understanding the numbers betters as well as offer recommendations according to the unique needs of your company. We have helped countless business owners stay on top of their finances, build a safety cushion and grow profits.

Get in touch with one of our accountants today to get a quote and let’s work towards growing your business together!