Benefits of Cash Flow Forecasting

Imagine if you had a report accurately predicting revenue, expenses, and cash flow month into the future. And the longer you use it, often the more accurate this report becomes.

Think that would be useful for decision-making, planning, and growth? Who wouldn’t? And that’s exactly what cash flow forecasting does for a business.

Cash flow forecasting is the process of estimating future cash inflows and outflows so that you can plan ahead for times when cash might be tight. It’s an essential tool for any business and can help you avoid some of the most common cash flow problems, like running out of money to pay your suppliers or being unable to take advantage of new opportunities because you don’t have the cash on hand.

Cash flow forecasting gives business owners the foresight they need to make informed decisions about their finances and avoid common pitfalls that can lead to financial difficulties.

This article will enumerate the benefits of cash flow forecasting so that you can take advantage of forecasting in your business.

5 Benefits of Cash Flow Forecasting

1. Improved Decision Making

Cash flow forecasting is comprised of direct and indirect forecasting. Direct forecasting is concerned with the company’s own actions and initiatives, while indirect forecasting relies on external factors that are out of the company’s control.

By producing both types of forecasts, businesses can make more informed decisions about their finances.

Businesses can identify potential problems and plan for them accordingly. Additionally, forecasts allow businesses to see problems clearly—as they arise—rather than being caught off guard by unexpected expenses. 

If you foresee a potential cash gap, you can implement corrective actions such as fine tuning your budget, seeking short-term financing or delaying supplier payments. Additionally,  if you have a surplus of cash, you can invest in new opportunities or pay down debt, allowing you to accelerate your business’s growth.

2. See Down The Road

Cash flow forecasting helps you identify possible problems that may arise in the future and take preventive measures to avoid them. This will help your business be more nimble and better equipped to handle challenges as they come. 

Forecasts make the difference between a reactive and proactive business. Giving thought to various future scenarios, hardens your strategy and helps prepare for the seen and unseen.

For instance, forecasting can help you gain visibility to hidden sales patterns that can lead to inventory issues. If you have too much inventory on hand, it ties up working capital and can result in unnecessary storage costs. On the other hand, if you don’t have enough inventory on hand, you may miss out on sales opportunities.

3. Improved Communication With Stakeholders

Another benefit of cash flow forecasting is that it can improve communication between you and your stakeholders. If you’re seeking funding, from a bank or investors, they’ll want to see a well-thought-out cash flow forecast that demonstrates an understanding of your business’s financial needs.

A cash flow forecast can also be used as a communication tool internally, helping to ensure that everyone in your organization is on the same page when it comes to financial planning and spending.

4. Greater Control Over Finances

By understanding where your cash is coming from and going, you can have greater control over your finances. This knowledge can help you make more informed decisions about where to allocate your resources.

For example, if you know that a large portion of your cash flow is going towards marketing efforts, you might decide to reevaluate your strategy to see if there are more efficient ways to spend your marketing budget. If marketing campaigns are not producing the expected ROI,  you can redirect those funds to another area of your business that is more cash flow positive.

5. Gives You A Clear Picture Of Your Business’s Health

Cash flow is the lifeline of any business. It’s important to keep a close eye on your cash flow so that you can ensure your business is healthy and running smoothly.

By doing a critical cash flow analysis on a regular basis, you can gain insights into your business’s overall financial health. This information can help you make informed decisions about where to allocate your resources and how to grow your business.

This analysis also helps you identify time-sensitive targets that need to be met in order for your business to stay afloat. For instance, you might identify that you need to increase sales by 10% in the next quarter in order to cover your overhead costs.

Forecast With Accuracy And Make Confident Decisions

Cash flow forecasting is a valuable tool that can help you gain insights into your business’s financial health. It can be very granular, giving you the ability to see exactly where your money is coming from and going.

The core objective is ensuring you have enough cash to cover your expenses and meet your financial obligations. To do this, you need to have a clear understanding of your cash flow. 

To help, we’ve created a free basic forecasting template you can access, right here. And if you’d like to find out how it directly helps your business, let us know.

A professional accounting firm, like Celerity, helps you forecast your cash flow with greater accuracy than you could DIY. We have the experience and expertise to give you the insights you need to make confident decisions about your business’s financial future.

Celerity is an accounting and consulting firm that has been helping businesses just like yours crunch their numbers, plan for different financial scenarios and prepare actionable plans for the future.

Schedule a consultation today to learn more about how we can help you forecast your cash flow and weather any financial storms that may come your way.