Are you looking for ways to improve the cash flow forecast in your business? You have come to the right place. We will try to explain how this important function of cash management can help businesses and the owners in easy steps.
Benefits of Cash Flow Forecast in Business
1. Control of cash flow
A cash flow forecast is a prediction of future cash inflows and outflows over some time. It helps you to predict the amount of cash you will have in the bank at any given point in time in the future.
This helps you to know when you need to borrow money, negotiate better terms with your lenders, identify times when you may have excess cash and invest it, etc.
- Know When To Borrow Money
A lot of businesses run into financial trouble because they don’t know when or how much money they will need. If you have a good cash flow forecast, then it’s easy for you to predict when your company will be running low on funds and when to talk to your financial institutions about a loan or line of credit.
- Negotiate Better Terms With Your Lenders
If they trust that your company has good projections, then they will be more likely to negotiate with you on the lending terms that are suitable for both parties
2. Avoiding financial problems
By creating a cash flow forecast, you can:
- Identify when you may have cash flow problems
- Plan ahead to solve the problem
- Take action to avoid the problem in the first place
3. Keeping to the budget
- The cash flow forecast will give you a good overview of your current financial situation and enable you to understand past events and predict future ones.
- You can compare your actual figures with what you have planned for, making you able to adapt your plans according to any unforeseen circumstances.
- By having a deep understanding of what is going on in your business, you are more likely to make better decisions for the future.
- If things don’t go as planned, the forecast will allow you to react quickly to unexpected financial changes.
- You can keep to your budget by using the cash flow forecast. Knowing how much money should be available at each point in the month allows you to see if there are any discrepancies between those amounts and what is actually in the bank account (or accounts).
4. Finding the best deals
If you are able to provide suppliers with a precise cash flow forecast, they might be willing to negotiate and find the best deal for your business.
The same goes for contractors and employees, as well as other service providers or software vendors.
A cash flow forecast gives you an overview of your payment terms and will allow you to avoid unnecessary expenses by paying up front. Furthermore, if your cash flow forecast is accurate, it can help you spot any potential problems or opportunities in time and adjust accordingly.
5. Raising finance
One of the greatest benefits of a cash flow forecast is that it enables you to get funding. Lenders or investors like to see a healthy business, so being able to present this forecast makes you more appealing as an investment. It shows that your business is profitable and can pay back what is borrowed, as well as providing reassurance that the company is stable and has plans for the future.
If you’re ready to start forecasting your cash flow, download our free templates today!
6. Motivating the team
When you have a cash flow forecast, you can use the data to motivate your team:
- Give employees a reason to be happy. If your company’s projected profit is high, you can give bonuses to each employee. You will definitely see a happy and more motivated team.
- Set realistic goals. With the cash flow forecast, you will be able to identify if the projects you are working on are feasible, allowing you to set more realistic goals for your business.
7. Increase profits and efficiency
You can increase profits and efficiency. Once you understand your business’s cash flow, you can use that knowledge to increase your profits and work more efficiently.
You’ll know exactly when money is coming in and when to pay expenses so you avoid late fees and penalties. Your business will be more efficient because it will have the funds available to operate properly, which means it will run smoothly.
Cash flow forecasting is a tool for business leaders. A cash flow forecast works well as a management tool because it helps ensure you’re on top of all aspects of your business: from sales trends to expenses, from customers who have not paid yet to vendors who need payment soon – all the way down to the daily bills that need paying. You can keep track of projected revenues, costs, and expenses for various periods so that nothing slips through the cracks or falls by the wayside unnoticed! This information is available at any given moment during normal business hours which allows managers/owners to make better decisions about how they spend their time while running their company as well as where they focus most attention throughout daily activities like checking email; making phone calls; scheduling meetings etcetera…
8. File taxes on time
Without a cash flow forecast, you might not know what your financial position is until it’s too late to do anything about it. This can lead to later surprises and an inability to plan or pay bills on time. That includes taxes! Taxes are due at regular intervals and they must be paid on time or risk penalties and possible legal problems.
By staying on top of tax due dates, you’ll stay in good standing with your government and avoid costly fines, seizures of property, or other legal headaches that could spell the end of your business.
9. Estimating profits and losses accurately
You would also be able to make decisions that are in line with your future projections. Let’s say your cash flow forecast shows you that you will need to hire more employees in the next few months. You can plan for this by interviewing and training new employees, and if possible, getting them on board early so that they can hit the ground running when their services are needed.
There are other advantages of predicting revenue including avoiding taking out loans, keeping a budget, comparing how you are doing against your budget, and finding the best deals for goods and services.
10. Safeguarding funds against emergencies
With a cash flow forecast, you can be prepared for emergencies.
Emergency funds are critical to any business operation. Ideally, you should have an emergency fund with enough money to cover at least six months’ worth of operating expenses. It’s also important that this money is kept in a separate bank account from your regular business checking and savings accounts. That way, it’s easily accessible without the risk of spending it on non-emergencies.
This emergency fund should only be used for actual emergencies: not for when you need extra cash to make payroll or just want to treat yourself to some new office chairs (though those chairs do look very inviting). If possible, once the emergency has passed, replenish your emergency fund right away so that you’re ready for the next one! If a client goes bankrupt or someone steals your company car, how long will it take you to recover financially?