Many New York startups and small businesses owners are facing tough competition in their industries, and need to find any advantage they can to get an edge. Cash Flow forecasting is an important technique that most businesses should be taking advantage of.  You might be asking what exactly is cash flow forecasting?  The short explanation: it is a process used so that your business can accurately predict or estimate your yearly profits vs. end-of-year debt.   It also allows you to get a clear glimpse of where your company most profitable revenue streams and see who you owe money to. Or in other words, a cash flow forecast is a financial modeling projection of an organization’s future financial position based on anticipated payments and receivables.  

It helps with setting up your budget and next year’s financial goals.  Here are 5 actionable ways a cash flow forecast can improve your business.   

Budget more effectively by tracking revenue and expenditures

As mentioned in the opening paragraph,  cash flow forecasting helps to pinpoint and analyze if your current revenue and expense budgets are accurate or way off the mark.  You will be able to manage and monitor revenue and expenses, giving you the necessary time make adjustments, to ensure you stay on track.  Another useful outcome of doing a cash flow forecast is it can help to uncover if you are overspending on certain costs. If you notice and identify these costs, you can take measures to pivot your business, and make changes to lower your expenses.     

Monitor and manage cash deficiencies proactively

By figuring out and knowing the cash situation of your business in “real time”, cash flow forecasting allows you take a proactive future cash deficiencies.  It is immensely important for a small business or startup to know when money moves in and out of your accounts.  Using cash flow forecasting tools help to identify cash shortages well in advance, giving you time to negotiate with suppliers, secure financing, change credit terms with clients or tighten up your payment terms to bridge the cash gap.   

Determine and spot new growth opportunities      

Your cash flow forecast helps to anticipate your business’s future cash levels, allowing you to determine which new business or marketing growth opportunities are worth pursuing vs. passing on. Your forecast will allow you to spot cash surpluses that can be reinvested for growth, having too much cash or working capital in the bank could mean it is gathering dust.   

This could lead to missed opportunities to grow your business.  There are many cash management software app tools such as Float app, that help you predict and identify cash surpluses, and using cfo consulting services will help you use this surplus for profitable growth.      

Scenario plan for future ‘what if’ questions     

It is not always clear with so many industries being disrupted, which is the best path for your business to stay ahead of technology innovation changes.  With a tool called scenario planning, you can explore the impact of different decisions on your business’ cash flow. This can be a good predictor in guessing the feasibility of your plans.  Can you afford to hire a new an employee?  When do you have an enough “free cash flow” to expand and open up a new office location?  Can you survive and manage a sales downturn?  By creating a scenario or financial model, you are scoping the likelihood or viability of these questions, and giving your self or team time to prepare.     

Determine flexibility in overcoming issues and making critical decisions

By forecasting your company’s cash, you are measuring your ability to weather financial problems and also to test the impact that decision made on using your cash. You forecast

Will assist in determining how much cash you should keep as a cushion or financial buffer, and this buffer will give you the flexibility to make mistakes.  Companies that run to close to the wire maybe limiting their options, and leaving themselves to the mercy of every little market volatility change.   

Conversely, having too much cash means a business is not maximizing opportunities.

Your virtual CFO will help to determine how much cash you should keep on hand to protect your business and to help your business grow at optimal levels.

What are Some Cash Flow Forecasting Goals?  

The high-level goal of a cash flow forecasting is to assist with managing liquidity within a corporation and ensuring that the business has the necessary cash to meet its obligations and avoid funding issues, essentially better management of optimizing working capital. Underneath the main goal of liquidity management, there are often a number of reasons why companies set up a cash flow forecasting process, these include:

• Covenant forecasting and half/ full-year reporting visibility.
• Interest and debt reduction.
• Short-term liquidity planning.  
• Long-Term Planning/ Budgeting Purposes (e.g. 3-year plan)

Cash Flow Forecasting Methods  

There are essentially two main types of cash forecasting methods – direct or indirect. Direct cash forecasting is a method of forecasting cash flows and balances for short-term liquidity management purposes, typically less than 90 days in duration. Direct cash forecasts often but not always include system based cash flows so as to make the cash forecast as close to real-time as possible.

Indirect cash forecasting is often longer term in nature and it relies on various indirect methods of building up a cash forecast such as using projected balance sheets and income statements.

The table below outlines the main differences between direct and indirect cash flow forecasting:  

Both the direct and indirect methods have their uses for different goals:   

• The indirect method requires less data input and is most useful for long-term planning. This is because it shows the amount of cash required to fund long-term growth and capital projects (something the direct method is less good at).
• If you want accuracy and detail over the short-to-medium term, then you should use the direct method. It is especially effective for ensuring you are managing your cash effectively. It also helps make sure you have the funds available when you need them. This enables you to invest or withdraw as much cash as possible without jeopardizing the business.

Conclusion    

For the past decade Probooks NY has helped many startups to analyze cash flow changes in their financial position, and help to use these insights, to grow their businesses. Get a free consultation today.   
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