How cash flow forecasting can benefit your business
When used correctly, cash flow forecasting is a powerful decision-making tool.
No matter how much time you spend or how well you prepare a cash flow forecast, your actual performance will almost certainly deviate from it to a lesser or greater extent. This, and the cost, often deters business owners from undertaking the process.
The benefits of cash flow forecasting
Good cash flow forecasts will allow you to better plan:
- The timing of any large purchases
- The use of an overdraft
- The effect of seasonal income
- The impact of tax payments
- To support hiring a new employee
- To forecast the impact of a new enterprise
Most bookkeeping or accounting software will have the ability to produce a cash flow forecast. The software will usually copy the previous period selected (annual/quarter/month). This should not be the end, but the starting point.
Using this as your starting point, review and update the income and expenses for your plans for the period ahead.
This may include adjusting crop varieties, the number of animals sold, the cost of employee’s wages, council tax and other reasons. The more you can base these adjustments on accurate figures, the more accurate and useful the forecast will be.
Updating the forecast
The best use of a cash flow forecast is to use it throughout the year, monitoring actual performance against it, and updating it when necessary.
To be useful, the forecast should be reviewed monthly, or quarterly at the latest.
This whole process can be done in hours, it need not take days. Bigger businesses will obviously have more complex forecasts, but again, these can be produced efficiently and without incurring a lot of expense.
It is important for forecasts to be realistic, there is no point overestimating income or underestimating costs to show a better position. The more realistic the figures, the more accurate they are likely to be, and the more useful the forecast.
Forecasts can then be used alongside benchmarking and sensitivity analysis – to be discussed in a separate blog.