Why Cash Flow Forecasting Is Critical to Success
Cash flow forecasting can show you the ups and downs in your business. If you want to know what action to take, this is one tool that can help.
A few budgeting tips here and there might help you remain profitable in the long run. And they can even help you achieve success.
But beyond the tips, one of the surefire ways for you to reach your goals through cash flow forecasting.
This is a tool that gives you a pragmatic projection of where your business is heading. This then puts you in a perfect position to take action in whichever situation demands it.
Of course, it has some additional benefits, too.
It Builds Confidence
The cash flow forecast targets three particular entities:
- Owners
- Banks
- Investors
It offers a fair amount of visibility and control over a business’ finances. A good projection, albeit still rough, can build confidence in all of the entities above.
Owners can see if they’re on track. If not, they’ll know when and how to take action.
For instance, investors can see the current standing of a company. A cash flow forecast may persuade them to put more funds in and help jumpstart new projects.
Banks, meanwhile, may use a cash flow forecast to assess the liquidity of a business. The health of this forecast can be the difference between getting and not getting a loan.
A cash flow forecast may even help you renegotiate your rates, thus improving your cash flow and financial stability.
Helps You Make Better Decisions
Both good and bad decisions come from the top. As a leader, you want to make as many good decisions as you can regarding your business, yourself, and your team.
Before you take any action, it’s critical to know how money moves in your company.
But here’s the thing – you can’t always rely on current or very recent data.
Cash flow forecasting takes into account a lot more information from the past months and years. And the final report can give you a better idea of what’s going on with your business.
Right now, you may think that you have had a great three-month stretch.
But what if it’s an anomaly? What if you can’t rely on the same numbers for the next quarter or the one after that?
Forecasting helps you gain much-needed perspective. At the same time, it forces you to think strategically about your next move.
The Question is… Who Should Handle Your Cash Flow Forecasting?
Ideally, this is a job best left for a company’s CFO. But in a small business, other people can handle it.
If you have an accountant, they should be able to manage your cash flow and build a forecasting model.
And if you have finance experience, you can even do it on your own. That’s probably best since you’re already the one that has to put the information to good use.
As your business grows, you’ll want to assign the task of cash flow forecasting to your finance team.
Know Your Finances
If you see warning signs of falling cash flow, forecasting may help. It can let you know what’s wrong and where to take action to prevent the same thing from happening again.
Knowledge is powerful. Getting visibility on your cash flow will help you see the peaks and troughs before they happen, and plan for these properly. You can also adjust your plans if things are going off track, instead of going into panic mode and making rash decisions.
Building a cash flow model is a worthwhile investment for your small business. Speak to your accountant about how this works, and begin the journey of getting more control over your business cash flow.