February 1, 2024
If you’re looking to gain critical insights into where your business’s finances are headed, our cash flow forecasting best practices will help you do just that.
Much like a ship relies on its captain to navigate treacherous waters and ensure smooth sailing, a business counts on cash flow forecasting to identify risks and better plan for the future.
The benefits of a cash flow forecast are many. It enables you to predict your business's financial future so you can plan for cash shortages, make the most of cash surpluses and measure performance against plans.
With the right cash flow analysis tools, you can work out if you need to reduce expenses or focus more time on generating sales. You can even see how specific changes – like launching a new product or entering a new market – will impact your finances.
In this guide, we share the most useful cash flow forecasting best practices to help you get started. You’ll learn about the essential factors to consider when forecasting sales and tracking expenses, as well as how cash flow forecasting tools can simplify the process.
Let’s first start with the definition of cash flow forecasting. Put simply, it’s a financial process that allows businesses to project future cash inflows, outflows and balances over a specified period.
This entails estimating future sales and expenses as well as accounts receivable and accounts payable figures. Cash flow forecasts can focus on a future period ranging from the upcoming month to the next 12 months and beyond.
The purpose of a cash flow forecast is to provide a snapshot of your business’s future liquidity to anticipate cash movements and make better strategic decisions. It helps businesses avoid cash shortfalls, honour debt obligations and wisely invest cash surpluses.
In short, forecasting allows you to enhance future operations, look out for potential pitfalls and plan your business’s growth.
A comprehensive cash flow forecast typically includes the following fundamental components:
The opening cash balance reflects the initial amount of cash available at the beginning of the forecast period. This figure reflects your bank balance, whether positive or negative, and serves as the foundation for your cash flow projections.
Cash inflows refer to the money expected to enter your business during the forecast period from a range of sources, including from sales, loans, dividends, tax refunds, corporate funding or rental income.
This component of cash flow forecasting involves projecting how much cash you will receive from each source, as well as when you will receive it. Historic financial and sales data, as well as analysis of market trends, customer behaviour and seasonal fluctuations can be used to inform estimates.
Cash outflows cover the expected expenses and payments exiting your business throughout the forecast period. These can include expenditures like salaries, rent, utilities, taxes, loan repayments, bank charges and interest payments.
It’s important to work out the amount you are likely to spend on these expenses and payments, and when you will need to do so. Invoices, payroll records, payment deadlines and supplier agreements can all be used to inform your projections.
The closing cash balance provides a view of whether your business has a cash surplus or deficit at the end of the forecast period. This involves adding net cash flow to your opening balance, which will reveal the residual amount of cash available.
With this figure, you gain a snapshot of your business’s financial health to help identify potential cash flow challenges and assess profitability. It also forms the opening cash balance for your next forecasting period.
Getting the most accurate results and fully reaping the benefits of cash flow forecasting requires factoring in multiple variables. This includes sales projections, expenses, as well as payments your business owes, and those owed to you, during the forecast period.
Let’s look at how you can best capture this data and integrate it into your cashflow forecast.
Forecasting involves estimating your business’s expected revenue over a specified period. In simple terms, it helps you predict how mucha business will sell and when.
Forecasting means analysing a range of data concerning historic sales, market and industry conditions, customer behaviour and your current pipeline. It allows you to establish realistic sales goals, optimise inventory, effectively allocate resources and align business strategy with market demands.
To enhance your cash flow forecasting, consider implementing the following best practices:
Clean and comprehensive data is essential for accurate forecasting. If you’re a smaller business, you may even rely on data managed in spreadsheets.
Keeping data up-to-date and accurate across all these systems is the responsibility of everyone in your organisation – from sales reps to business leaders. Clearly communicating a culture of data hygiene and establishing robust data standards can help improve data entry practices and ensure regular updates.
You may want to appoint key people within your business to ensure data standards are applied and regular data reviews take place across different teams. All these long-term efforts will ensure your data will provide an accurate picture of the future.
There are a range of methods commonly used by businesses to forecast effectively. Each method has its own advantages and limitations, and choosing the right one depends on your business’s goals, available data and resources. Popular methods include:
While your historical data can lend insights into business trends, it may miss potential factors outside of its scope. It’s important to factor in changes that may not be captured in data and will impact future business trends, including those related to:
Cash flow forecasts should not be static documents but dynamic tools that evolve with changing market conditions and business dynamics. It’s important to establish a regular cadence for reviewing and updating forecasts, ideally on a monthly basis. This will help ensure forecasts remain relevant and aligned with current performance and market trends.
Expense tracking is fundamental to gaining visibility of your cash outflows, thereby allowing you to accurately forecast cash flow. This calls for a robust system to keep track of expenses including:
Tips to help you keep on top of these expenses include:
To ensure accurate cash flow forecasting, it’s important to effectively manage all the payments owed to your business and those you owe to others. This involves factoring in the following accounts receivable and accounts payable considerations:
Tips for improving accounts receivable and accounts payable management include:
Once you have created your cash flow forecast, you can start experimenting with scenario forecasting. This technique involves amending your base level forecast by factoring in different underlying assumptions about future business performance, decisions, initiatives or possible upcoming events.
For example, with the help of cash flow forecasting software, you can create a scenario that factors in expanding into a new territory or launching a new product. You can also create best or worst-case scenarios based on your base level forecast. For instance, a scenario where you assume higher sales and lower expenses.
You can also create scenarios to assess the impact of external influences, like an economic recession, supply chain disruption or the introduction of new technology into your industry.
From spreadsheets to sophisticated cash flow forecasting software, there are a range of tools readily available to perform forecasting. Let’s look at some of the most widely used.
Given their flexibility and familiarity for most people, spreadsheets like Excel are an effective tool for basic cash flow forecasting. You can customise spreadsheets as you see fit, and they make it easy to enter and manipulate data. However, with this simplicity comes drawbacks.
Creating a cash flow forecast in a spreadsheet will require significant time and effort, taking anywhere from hours to days. You will also need to manually manipulate data whenever there’s a change to business circumstances, plus the lack of sophistication of spreadsheets means figures and calculations may include errors.
Software for cash flow forecasting like Fathom can provide more sophisticated functionality to create detailed cash flow projections, analyse various scenarios and generate visually appealing reports with ease.
Fathom offers several advantages over traditional spreadsheet-based forecasting methods:
You can gain an idea of how easily you can customise a cash flow forecast with Fathom in the video below.
https://www.youtube.com/watch?v=YLEITcifQhI
Cash flow forecasting is a powerful tool to help your business plan for potential cash shortages and identify areas where you can really move the needle in terms of financial performance.
To truly get the most out of forecasting and simplify the process, make sure to:
If you want to avoid the complexities and limitations of spreadsheets, why not see how you can simplify cash flow forecasting with a free 14-day trial of Fathom? Test out its features for yourself and see why it's trusted by over 80,000 businesses worldwide.
Fathom is designed with specific cash flow forecasting functionality that allows you to visualise your planning, test different scenarios and forecast up to five years into the future.
Live forecasts mean you’ll never have to worry that your data is out of date, and you can even create multiple forecasts for your different business units or departments.
You can discover more about Fathom’s cash flow forecasting features in our help centre, while our blog contains a range of tutorial webinars and customer stories to explore.
Two of our most popular introductory webinars include our cash flow forecasting overviews for businesses and accountants.