Five Benefits of Cash Flow Forecasting

​A new year has begun, and you anticipate a record year of growth and profit for your business. Careful financial planning and management are key to making these goals a reality—and this is where cash flow forecasting comes in. In this article, we will talk about why cash flow forecasting benefits your business and how you can get started. 

What is cash flow forecasting?
Cash flow forecasting is when a business estimates its future revenue and expenses for a given period (anywhere from one- to-12 months). Creating a cash flow forecast gives a business the ability to be the most efficient with its time and money and even take advantage of any windows of opportunity that may arise to increase sales or profits. 

Without a cash flow forecast, businesses can lack the key financial information needed to give them the confidence to grow. Businesses can also be taken off-guard by expenses or unexpected costs if they have not anticipated them ahead of time. 

Five benefits of cash flow forecasting
Cash flow forecasting is a vital step for any business that wants to thrive. Cash flow forecasting helps businesses:

1. Gain confidence in their finances. Knowledge is power—and knowing what they can reasonably expect will enable businesses to prepare in advance, increase day-to-day efficiency, and adapt when the unexpected happens. Business owners can also be more confident when communicating their business to customers, suppliers, potential lenders, or financial consultants. A cash flow forecast will also reveal inefficient or ineffective systems or plans currently being used to run the business.
   
   
2. Plan for expected sales and expenses. The year flows in cycles and seasons, and businesses are no exception. A cash flow forecast will reveal what times throughout the year sales increase (perhaps for a holiday or a change in the weather). Likewise, it will also show predictable expenses, allowing businesses to plan ahead so they are not strapped for cash when those expenses arrive.
   
   
3. Grow understanding of customers and suppliers. A cash flow forecast is created using past data from a business to predict and estimate future revenue and expenses. Over time, the data can help businesses learn about their customers and suppliers. There may be opportunities, insights, or patterns that can be used to strengthen business connections and increase revenue. 
   
   
4. Plan for growth and investment. Cash flow forecasting will highlight what times throughout the year may have some available cash to invest in growing a business. A cash flow forecast can also make managing debt easier and help business owners evaluate the value of new sales or opportunities.
   
   
5. Raise profits. Whether it comes with decreasing costs or increasing revenue, a cash flow forecast empowers business owners to make wise decisions about when to spend, when to save, and what opportunities exist to increase sales or efficiency. 

Five things to keep in mind when cash flow forecasting
When business owners begin cash flow forecasting, they should keep these things in mind:
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1. Set a defined timeframe to forecast for. Recommended forecast times are anywhere from one- to-12 months. Forecasting in shorter timeframes allows business owners frequent reviews to determine forecast accuracy and adapt accordingly.
   
   
2. Estimate all cash inflows, outflows, and expenses. Include any price increases, wage adjustments, and tax or loan payments. A forecast should also include non-sale revenue, such as tax refunds. 
   
   
3. Estimate reasonable assumptions for the future. There are reasonable assumptions that can be included in a business’ forecast, such as seasonal sales or inflation. Both seasonal sales and inflation can be estimated based on past sales, trends, and statistics.
   
   
4. Leave room for unexpected changes. Businesses should always leave room for unexpected expenses with an “other” category in their cash flow forecast. Weather disasters, supply chain issues, or customer needs may arise, and expecting the unexpected will prepare a business to meet those expenses head-on. 
   
   
5. Review the forecast against the actual and adjust over time. Cash flow forecasting is not an exact science; however, the accuracy and effectiveness of a forecast will improve over time if it is regularly reviewed and compared to the actual revenue and expenses—enabling business owners to adapt and grow as they go.

Cash flow forecasting gives businesses a financial roadmap to know where they’ve been, where they are going, and what hazards and possibilities may lie ahead. 

Looking for guidance on how to start cash flow forecasting today? We can help. Prairie Business Credit is a national working capital provider to young, growing, or recovering businesses. We offer accounts receivable financing, purchase order financing, and equipment financing. Our company serves both as a trusted financial resource and consultant to entrepreneurs dedicated to building their businesses and ensuring their success.
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