Unfortunately, many businesses struggle with cash forecasting which leads to bigger problems. In fact, about 82% of businesses fail for this very reason.
The cause of these problems is often a lack of planning. They either:
- Don’t have the time
- Don’t understand the importance of a healthy cash flow
- Don’t have the tools they need to manage it properly
Once their cash flow starts to deteriorate, it creates a negative impact on operations related to hiring, firing, investing, and other big, real decisions owners have to make on a regular basis. Not to mention, cash flow problems also pull you away from reaching your business goals.
This all leads to constant stress and, as we mentioned, hurts the business. However, the solution is simple. Cash forecasting.
Let’s take a look at how cash forecasting can help alleviate cash flow problems and help you reach your business goals.
What is Cash Forecasting?
To fully understand cash forecasting and its importance, you first need to understand cash flow.
Cash flow is a measure of the money flowing in and out of your business. A strong cash flow means the money you are bringing in outweighs the money you are spending. You can measure your cash flow over any period of time but typically it is measured on a month-to-month basis.
Cash flow is one of the most important metrics you can track. It is the lifeblood of your business and a healthy cash flow is usually an indicator of a healthy business. Without a strong understanding of where your cash flow stands, your business could suffer.
This is where cash forecasting plays a crucial role. It’s the best route for managing your cash flow.
Essentially, cash forecasting is an estimate of your cash flow over any period of time. When you rely on this tool, you’ll be able to catch cash shortfalls and make quick adjustments before they turn into greater issues.
Cash forecasting will also aid in making decisions to help your business grow.
For example, investing is a great way to build business wealth. With cash forecasting, you can see how much money you have coming in and whether or not now is a good time to invest.
If you predict a healthy cash flow for the next quarter or two, you may decide now is a good time to make this move. If you see less cash flow than you’d like, you can start implementing strategies to improve it – we’ll touch on some of these strategies later.
What is the Best Approach to Cash Forecasting?
Proper cash forecasting starts with good accounting. You need real, accurate numbers to be able to create forecasts that will help your business see success.
In this day and age, good accounting is best done through tools like QuickBooks Online (QBO). QBO records and tracks all of your data, ensuring accurate, up-to-date numbers at all times.
Once you’ve nailed down the accounting step of the process, you’ll need a cash projection tool, like the one we use at PlotPath. Our tool exports from QBO, so it’s not just another spreadsheet exercise outside of your accounting system. It uses your real numbers to produce real cash forecasts.
With the help of cash projection tools that export from QBO, you don’t have to base important decisions on gut feeling or background knowledge about cash balances and expected money coming in and out. Instead, you’ll have concrete numbers to create accurate cash forecasts.
Tips For Improving Cash Flow
Once you’ve created your cash forecasts, you may find your cash flow isn’t as well off as you’d like it to be. In this case, you’ll need to implement new strategies to improve your cash flow.
Manage When You Pay Your Expenses
It’s important to remember you don’t have to pay all of your bills at once. Try spreading them out and only paying when they are due. This disperses your expenses so you don’t see a large outflow all at once.
You could also try spending around or after you’ve seen a large inflow of cash. Again, this helps balance out your in and outflows.
Adjust Your Prices
Your pricing plays a huge role in the strength of your cash flow.
If your prices are too high, your customers/clients won’t buy and you won’t generate enough cash. If your prices are too low, you won’t reach your full profitability.
In an inflationary period, this strategy becomes even more important.
Focus on Your Accounts Receivable
You may be getting the work done, making the sales, and serving your customers, but if your accounts receivable are not in check, your cash flow will suffer.
Here are several ways you can improve your accounts receivable:
- Send invoices out immediately and reminders when they are past due (there are tools that can help with this)
- Create a payment contract so clients know your expectations
- If applicable, request deposits
- Make sure your payment process is easy from the client’s perspective
Use Cash Forecasting to Your Advantage
Cash forecasting is an essential tool for managing your cash flow and proper cash flow management is key to making smart business decisions.
At PlotPath, we are experienced in helping business owners manage their cash flow and create cash forecasts that help them make tough decisions. As we mentioned, we created a FREE cash projection tool and you can access it here!
However, if you’d like help managing your cash flow and creating cash forecasts, contact PlotPath today! We’d love to help you put the tools in place to reach your business goals!