Advantages of cash flow forecasting
As a business owner, there are several advantages of cash flow forecasting that you should be aware of.
When it comes to remaining competitive within your market, a well-developed and executed cash flow forecast is paramount.
What is the difference between cash flow and cash flow forecasting?
Cash flow is the daily income and expenses that flow in and out of your business.
A cash flow forecast is a process of forecasting a company’s future financial performance based on projected income and expenses.
The key difference between the two is that business cash flow forecasts involves more than simply keeping track of your finances.
A well-developed cash flow forecast requires the ability to understand and interpret fluctuations in income, expenses, seasonal trends and impacts from the external and internal environments and how these fluctuations might affect your cash flow in the future.
For example, if you own an eCommerce business, based on historical data, you could forecast that your cash flow will surplus after Christmas and Boxing Day sales.
Benefits of cash flow forecasting
As a business owner, you will likely appreciate the importance of anticipating the future.
Just some of the advantages of cash flow forecasting include:
1. Anticipate drops in cash flow before they happen
Cash flow forecasting allows you to anticipate drops in cash flow before they happen.
Granted, you might already know the usual off-season dips for your business.
But, when you also incorporate the internal and external environment impacts, your forecast will be more accurate in predicting surpluses and deficits.
When you can anticipate your firm’s future performance, you can be proactive on the bottom line.
For example, you might need to hire Christmas casuals to cope with increases in demand.
2. Prepare contingency plans for reduced cash flows
Looking at historical data and the external environment will also help you to prepare contingency plans for reductions in cash flows.
Although reductions can occur at any time, knowing them ahead of time will prevent you from overspending and putting your company in potential trouble.
For example, keeping track of the seriousness of COVID-19 helped a lot of businesses predict changes in the work environment, prior to them happening.
This ability to plan for the future and make contingency plans for reductions in productivity and therefore, profit, many businesses were able to adapt with ease.
3. Demonstrate your ability to plan to creditors
Thirdly, the ability to anticipate and respond to fluctuations in cash flow is very encouraging for creditors.
That’s because creditors are more likely to lend to responsible spenders that are conscious of their boundaries.
This is particularly advantageous if you are looking to expand in the near future.
Have your 2021 annual cash flow forecast set up with Simmons Livingstone & Associates
Your business will thrive with a reliable cash flow forecast.