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Cash flow forecasting refers to a plan or estimate of a business’s financial position in the future. It predicts what money will be coming in and going out for a set time period. In most cases, it’s based on yearly figures, but one should monitor it closely with each passing month. It considers incomings, outgoings, loans, sales, and expenses. So, every penny that passes through the business ought to be included in your cash flow forecast.
It can also be used to figure out possible future growth and outcomes based on past events and good management insights. Cash flow forecasting works alongside company budgeting and planning, which means it should be a regular part of a company’s financial structure.
Business owners should also note that cash flow forecast is different from profit forecasting, as the latter is based solely on income generated and costs incurred. In contrast, a cash flow forecast is dependent on when payment is received and when expenses get paid. It also allows a company to enjoy some of the benefits of being VAT registered.
Cash flow forecasting is an essential tool for business planning. It can be done in several ways, with the spreadsheet technique being the most common.
That said, the following are some of the main advantages of cash flow forecasting:
Forecasting will enable business owners to spot potential cash gaps before they hit. This will allow for sufficient time to make changes, such as cutting down on operating costs or waiting to update your equipment, until you’re in the clear. You could even change some of your customer payment terms or look for alternative financial options until things get better. The most important thing is that you can see the upcoming issues and make the necessary preparations.
If your cash flow forecast keeps falling short every month, you will be able to note the late payers within your portfolio. This will clarify which clients are affecting your bottom line. Your forecast will also allow you to see how much would be coming in if everything went according to plan. Having such knowledge will enable you to spot any downfalls whenever figures aren’t met and identify the culprits responsible.
Cash flow forecasting can assist you in tracking your outgoings from the business without having to do it manually. This is true even if you’re employed and self-employed at the same time. For instance, if you set a figure that represents the expected expenses of your business each month, like payment for utility bills, you will be able to calculate your guaranteed total outgoings. If that figure is higher than it ought to be, it will be easy to identify which area of the business is overspending. If it weren’t for forecasting, you wouldn’t be able to notice such errors unless you checked manually.
Having a cash flow forecast means that you will run through hypothetical business situations and evaluate their possible impacts. For instance, if you opted to expand into another country, you could forecast your cash flow to see if you would be able to afford the transition using accurate data. Using a detailed cash flow forecast will also allow you to change independent variables and develop informed business strategies based on what works best for your situation.
There are numerous advantages of using a cash flow forecast, but its primary role is to protect your business by trying to pick up on any warning signs before they occur. It offers some glimpse into the future of what your business could achieve with the backup of accurate data, which is essential for business decisions.
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