As a business owner, one of the most important traits to have is foresight. Foresight of the market conditions and its effects on your business, is a key component in helping your business make steady profit. Certain tools of financial management can help a business owner create a tangible forecast, one such tool is known as cash flow forecasting. A cash flow forecast, simply put, is an estimate of the flow of cash into and out of your business. Most businesses like to create a forecast of up to 12 months. However, smaller businesses and start ups prefer creating a forecast for up to 3 or 4 months, given the fluctuating nature of their cash flow.
A cash flow forecast plays a very important role in determining the steady growth of any business, as it not only allows you to estimate your income in the future, but also helps in identifying the weak links of your company. It gives you a holistic analysis of your company and gives you the opportunity of tweaking your business strategy accordingly. As it is such an important aspect, obtaining an accurate cash flow forecast becomes of utmost importance. Today, business owners have the option of taking the help of accounting apps such as PayPie, that provide timely and accurate cash flow forecasts. Such apps not only provide strategic insights into your business by tracking and analysing your activities, but also help you manage your cash flow effectively. However, with the help of an app or otherwise, to project an accurate cash flow forecast, there are certain aspects that must be focused on. Let us now take a look at some of them.
Correctly Identify the Inflow of Cash
The first step while preparing a forecast should be the correct identification of your sources of income. To gather an accurate estimate, one may refer to past year’s sales figures to determine the steady sources of income throughout the year. It is also important to factor in the periods where sales might increase or decrease rapidly, such as the holiday season or the tax season. New businesses that cannot refer to previous sales figures, can prepare an estimate with industry standards as their reference.
Business owners must also factor in the reliability of customers and adjust their estimate keeping in mind the customers who are known to make delays in payments. They must also factor in the new business strategies that they are implementing, and the income to be made by it.
Correctly Identify the Outflow of Cash
Correct identification of outflow of cash is equally as important as the identification of inflow of cash. Cash outflow consists of the money that you spend. These expenditures are both fixed and variable. While it is easier to identify the fixed expenditures, as they include monthly recurring bills, rent, salaries and other such recurring costs, the variable expenditures are a little harder to identify. However, the look into the past figures can give you an idea about the variable expenses that you may incur.
A cash flow forecast should not be set in stone. Thus, once you publish your forecast, you must keep making adjustments as you move forward with the business year. A dynamic cash flow forecast helps you identify opportunities to improve your business strategies, and put your business in a better position in terms of cash flow. Comparing your forecast with the real time figures may help you save your business from an oncoming crisis.
A cash flow forecast, thus, not only keeps an eye on the expenditure and income of your business, but also helps you create a fail proof business strategy, guaranteeing steady profits.