Guest post for CFO on Call written by Float
Think it’s impossible to predict the future? With cash flow forecasting, think again.
Here are the top 10 things you need to know about cash flow forecasting and how it can help your business.
A cash flow forecast shows how much will be in the bank each day, week or month.
Cash flow represents the money going into and out of a company’s bank account over time. Forecasting this cash flow tells you what your future bank balance will be at the end of each time period, enabling your business to plan accordingly.
A cash flow forecast is different than a budget, but both are integral for business success.
A budget maps out the income and expenses a business is expecting usually on a monthly basis, while a cash flow forecast shows exactly when the cash will enter and leave a business’s bank account. While they serve different purposes, both a budget and a cash flow forecast are critical to ensure the funds you need to grow your business are available at the right time.
A cash flow forecast helps businesses take advantage of cash surpluses.
A cash flow forecast can reveal when your business will have excess cash on hand and help you decide how to take advantage of this sitting cash, such as by reinvesting it in the business or taking a dividend.
Cash flow forecasting helps businesses avoid future cash deficits.
Knowing how much money your business will have in the bank will draw attention to times when cash will be running low, helping you make important decisions such as whether to take out a loan or whether to cut costs for that time period to compensate.
A cash flow forecast draws on the past to more accurately predict future cash movements.
Simply looking at the past won’t tell you how your business will perform. However, using historic trends and averages in your company’s cash flow can increase the accuracy of your cash flow forecast and bring your estimates in line with actuals.
Answer future ‘what if’ questions with different cash flow scenarios.
Within a cash flow forecast, you can play around with different scenarios which allow you to estimate the impact decisions like hiring a new employee, buying a new printer, or moving offices will have on your bank balance.
A cash flow forecast is an effective way of communicating information to stakeholders.
A cash flow forecast provides an accurate picture of a company’s financial situation at a given point in time. This information can be compiled into a report and provided to a range of stakeholders including board members, external advisers, and clients.
You can create a cash flow forecast yourself in a spreadsheet or use an add on for Xero to do all the heavy lifting for you.
There are countless cash flow forecasting templates for spreadsheets that are available online through an easy Google search. However, forecasting with a spreadsheet is prone to human error as it requires constant number-crunching.
Luckily, there are add ons like Float that import your company’s financial information directly from Xero to create a user-friendly cash flow forecast — free from the headaches of a spreadsheet.
Other Xero add ons can help you get paid on time to contribute to an even more accurate forecast.
There are over 500 Xero add ons that can help you run your business. Chaser automatically sends invoices and reminders to clients who have yet to pay, increasing your chances of getting paid on time. Practice Ignition facilitates the process of engaging and charging a client by automating on-boarding, proposal generation, engagement letters, and recurring invoices.
Check out the Xero marketplace for more information.
A clear plan for your future cash situation is critical for business success.
Whether you want to attract outside investment to facilitate growth or take significant drawings, a cash flow forecast gives you the tools you need to plan for your business’s future.