Want to be prepared against dwindling profits in the future? A Cashflow Forecasting System is the ultimate go-to for any small-business. It is used to predict cash flows and thus alerts of any future cash flow issues months or years before they come. This, therefore, gives the business management team time to restructure against impending problems, avoiding the downward trail. Easier said than done. Despite having predictable cash flow cycles year in year out, small businesses are still unable to track, predict and counterattack cash crunches. So, where does the problem come in?
Cashflow forecasting requires intricate details and hard work. First, the management has to come up with a robust spreadsheet inclusive of all the business’s details.
The good news in this era is that there are automated ready-to fill systems that are both accurate and concise. Software tools like FloatApp ease the process by calculating the probabilities for you, leaving you to infill data and assumptions. To get the most precise results, ensure that the model reflects reality as close as possible. Do not be overambitious or disingenuous otherwise predicted results will be an utter waste of time.
To build a great cashflow forecast, there are 5 principles to consider:
1. Prepare a 3-way integrated forecast
This is a special type of model that combines forecasts based on the 3 basic financial reports for businesses – the Profit & Loss, the Balance Sheet, and the Cashflow Statement. These produce cashflow numbers that have accounting integrity and do not omit any critical details.
2. Set specific cashflow
attributes for every category.Come up with different cash flow categories. One for your staff wages, electricity bills, stock purchases and so on. This enables the cash flow forecast to use specific attributes suited to each category. It will take more time but the precise nature of the results will leave you smiling!
3. Build a dynamic model
When putting a forecast together, you will often face a choice between entering actual revenue numbers or building the numbers up from the operations drivers. This means either putting in revenue collected or entering units sold, the driver. Both yield accurate results but the former tends to be simpler.
4. If it’s not up to date, it’s out of date
Keep updating your cashflow as per the trends. In the world business, things change as fast as in weeks’ time. Customers’ preferences change, price and cost margins change. As the environment around your business changes, it is important that your cashflow forecast changes in order to match it. Failure to do this will yield outdated forecast which can be misleading and could cause the downfall of your very potent business.
5. Play with different scenarios
As economic trends change, so should your forecasts. Create several scenarios as per unpredictable changes. Have different set-ups perhaps with new assets, product lines, sales growth, decline, any scenario that could be a possibility in the future. Forecasting may not always know what the future holds, therefore working from many points of view increases your chances of a perfect prediction.
With this said, what is cash flow management and why is important?
A common word in the world of business accounts, but really, what is cash flow management? Cash flow, refers to the amount of money, cash, and non-cash, traveling into and out of a business. A positive cash flow yields more incoming than outgoing cash while a negative has more going out. Cashflow management is controlling this cash flow to ensure the first scenario, positive cash flow, is met optimally. Cash flow is calculated by looking at initial cash, then comparing it with the cash present at the end of a specified period. This said, getting good at cash flow management will leave your business thriving!
Why is cash flow management important?
There are numerous reasons to prioritize cash flow management. Here are the top reasons:
1. Predict deficits.
As seen in cash flow forecasting, you will be able to manage your resources to predict seasons when the business may fall short. This helps you position yourself better against the losses. Good systems will actually predict weeks months or days before the shortfall happens. This gives you ample time to strategize yourself, hereby neutralizing the deficit.
2. Reduce stress
Apart from the loss of a loved one, business failure is a leading cause of blood pressure, stress, and other psychological disorders. ‘My business fails, how do I raise the mortgage? My kid’s education insurance fees? How will I sustain my family?’ All these and other questions will escape your mind once you have good cash flow management simply because nothing will catch you off-guard. Despite not being able to solve all problems, being aware that they are coming will relieve a lot of unnecessary pressure.
When you’re managing cash flow, you are able to know how potent your resources are, therefore are able to you know exactly when to invest in expansion, a new commodity and so on. Sometimes you may be tempted to think you have extra money lying around while in actual sense expenses may exceed the expectation in the near future.
In a nutshell, good cash flow management will see your small business thriving and growing even in difficult times. This is because you’re able to predict and therefore plan against futuristic losses and shortfalls. Good cash flow management has many benefits, the three being the topmost. Invest in serious cash flow management and alongside it, get a cash flow forecasting tool then sit aside and watch your business bloom!