Many business owners have found that forecasting cash flow has helped them anticipate potential shortfalls and plan accordingly to cover difficult periods.

Cash flow forecasting, even in unusual times, offers your business several advantages. It enables you to avoid making rash decisions and protects your business over the long run. You can make informed business decisions based on the timing of your cash flows and adjust your future working capital needs before you actually need the funds. You can determine what credit terms to offer to customers, based on their payment history. As you identify and address late-paying customers, you can take action to obtain customer payments in a timely manner.

Some of the banking and financing benefits of cash flow forecasting include:

• Preserving your company’s good credit standing by reducing or eliminating late payment.
• Obtaining or increasing a line of credit before your business actually needs the funds to support operations.
• Paying down high interest rate debt or investing excess cash to earn interest through vehicles such as liquid money market or sweep accounts.

Performing cash flow forecasting is easier than you might expect.

• Start by determining the time period that best suits your business, such as weekly or monthly. This may depend on how often you bill customers, your payment terms and payment terms for suppliers.
• Begin with the cash balance held in the bank and add in anticipated cash receipts from customer payments, draws against your line of credit, and other relevant inflows.
• Subtract payments made for running your business, like rent, credit cards, utilities, vendor payments and other cash outflows.
• Your cash inflows should meet or exceed your cash payment requirements. If you foresee a shortfall, consider how you can address it, either pushing for faster customer payments or drawing on your line of credit.
• Extend your forecast at least two to three months into the future to establish a rolling outlook for the quarter.
• Update your forecast monthly.

Cash flow forecasting enables you take a proactive stance and to better understand your future cash needs and potential spending gaps. Using cash flow forecasting will allow you to avoid surprises and make better business decisions.

Do you have questions on how your business can use cash flow forecasting or other issues that could be addressed by outsourced financial consulting solutions? Please contact a member of our Virtual Financial Consulting – Outsourced Department.