If your business has a healthy cash flow, it has more chances to grow. On the flip side, if it is suffering from cash flow issues, it may struggle to stay afloat. No matter what your business size is, you need to do financial forecasting, as cash flow is the lifeblood of your business. So, if you want to grow to business, you need to do a cash flow forecast to assess how much money comes in and goes out of your business at a particular period.
It helps you to make informed business decisions based on predicted income and expenses and provides an overview of the future cash flow. Read on this guide to know what is cash flow forecast, why it is important, and how to do it. Let’s dive in!
What is Cash Flow Forecast?
Being a financial planning tool, it is an estimate of the money that your business expects to receive and pay over a specific period (usually a year). It needs to include all your revenue sources like sales and other payments from customers and compares them with the business expense that you are likely to pay. These expenses may include, taxes, supplier payments, rental expenses, etc. To do this, you need to plot timings that will allow you to plan for both busier and quieter months.
A cash flow forecast is one of the key parts of the business plan that assists you by providing viability of any investment. It doesn’t need to show the exact figure of what you will get and pay rather, it is an estimate of a round figure. To get a deeper understanding, you need to understand what are cash inflows and cash outflows of a business.
Here is the list of cash inflows:
- Expected earnings from sales
- Sales of company assets
- Accounts receivables
- Loan advances
- Employee wages
- Operating expenses
- Accounts payable
- Loan payments
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Importance of Cash Flow Forecasting
It is one of the essential business documents that keep you on top of your finances and manage your business operations. Here are some of the great benefits of creating and updating your cash flow:
- Planning tool for your business activities and resources
- Predict surges or shortages in cash flow
- Ensures that your business activities are aligned with each other
- Forecast how those decisions will affect future cash flow
- Allow you to make sensible and realistic business decisions
- Provide context and information to stakeholders
- Helps you to plan for future
How to Forecast the Cash Flow for your Business?
To forecast the cash flow of your business, you need to use these three components to get an accurate and up to date business representation for the present and for the future. These include:
- Estimated Sales: You need to estimate the sales of your business by observing the previous sales, and seasonal variations
- Payment Timings: With your forecast, along with the cash, you need to ascertain the time in which you are going to receive it. Like what will be your 30-day target
- Expenses/Costs: You need to include both fixed and variable costs. Fixed costs remain the same regardless of your sale, but variable costs change based on the sales volume
Quick Sum Up
So that’s all about cash flow forecast. By doing it, you can make realistic and better business decisions based on the assumed results you get from the forecast. It keeps you on top of your business finances and improves the overall business performance by predicting the future. With its elements, you can do a forecast to improve the cash flow of your business.
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Disclaimer: This post is only meant for general information on the topic.