As a lender consultant, one of the primary problems my clients face, regardless of industry, is that they have a very low average cash balance or not enough cash when needed. One of the best tools they can use for monitoring and predicting these situations is a cash flow forecast.
So what is cash forecasting, and how can this help YOUR business? Glad you asked! I’m going to cover exactly that in this post.
Cash Flow Forecast Defined
A cash flow forecast is one of the most powerful and most overlooked tools in a business’s financial toolbox. The report creates an informed prediction of the cash ins and outs over a set period and can be adjusted on the fly given different circumstances. This projection is invaluable for preparing for future scenarios and helps in making informed decisions. The projection starts by analyzing current financial statements and bank balances then predicts upcoming inflows and outflows based on projected revenue and expenses in each case.
The forecast is able to run through different scenarios to provide potential outcomes. Usually, models use a base (likely) case, best, and worst-case scenarios. While the result is not 100% guaranteed, it provides guidance and planning opportunities. When paired with annual budgets, the effectiveness increases greatly. The ability to make information-based tactical decisions generates better business plans, year over year.
Forecast Reporting Benefits
Now that we understand what cash forecasting entails, we can appreciate how running the model monthly or even weekly can benefit our business. But let’s dive into some more concrete examples of the benefits of utilizing this financial report.
Determine if Spending is On Track
Often companies overlook the comparison of budget to actual on a regular monthly, quarterly, and annual basis. Determining whether expenses budgeted match actual spending is as important as determining if the business is generating sales as planned. If the company is spending $2 for every $1 budgeted, there will be a cash flow problem if revenue hasn’t increased as well. Expenses will need to be adjusted, and/or revenues increased.
Additionally, when the cash flow projection is included (preferably a rolling 13 week reported weekly), we can see sooner and with better foresight if our cash position is healthy and whether that position will be sustained.
Identify & Plan for Shortage & Surplus
A primary benefit of preparing the forecast is generating an understanding of when your business may have an upcoming cash shortfall or surplus.
Once you’ve identified that you anticipate a shortfall, you may take steps to determine the cause and create a plan to mitigate it. This lead time allows your business to plan to reserve a surplus for upcoming shortages or arrange financing at lower rates and better terms.
A forecasted surplus is also an opportunity to identify how to best use those funds ahead of time. Whether that investment is new employees, upgraded equipment, or holding for an upcoming shortage, you’re now able to create a better plan.
Informed Decision Making
The most obvious benefit is the ability to make informed decisions. As we can see, identifying and planning creates the ability to make an informed plan rather than winging it. There’s nothing quite like spending your surplus one month just to have a shortage the next month and regretting not having advanced knowledge.
Making informed decisions based on the best financial data available allows your business to create practical plans to reach long-term goals and grow.
Things to Remember – Potential Disadvantages
Not all that shimmers is gold. There are a few things to remember when focusing on your cash flow forecast.
- Garbage In, Garbage Out – the projected information is only as good as the data entered. Additionally, it does take some financial savvy to interpret and apply the numbers.
- Unforeseen Factors – i.e., hey pandemic, no one predicted you! Disasters, new government regulations, and changes in the competition can impact cash flow and are typically unpredictable.
- False Security – The models do give some executive teams a false sense of security. Note that forecasts are estimates and subject to change.
Improving Your Cash Flow During Shortages
There are a few options to help improve your cash flow during a shortage.
- Improve Receivables Management
- Renegotiate Terms with Vendors
- Decrease/Eliminate Expenses
- Increase Prices/Fees
- Consider Financing
The above list represents only a handful of the possibilities available to increase your cash flow. Here at Liquid Ally, we specialize in assisting our clients with improving their receivables management and obtaining financing that fits their company’s specific needs during a cash shortage or a needed cash increase. We’re here to help sort through the noise and find a solution that’s right for your company.
Control Your Cash Flow
My mission at Liquid Ally is to assist my clients in understanding their cash flow and improving their ability to maintain their cash position by securing the cash they need NOW. Together we work toward developing a stabilized balance sheet.
As part of my Complementary Liquidity Assessment, we discuss the potential causes and solutions to your cash flow situation. Call me today to see how Liquid Ally can get cash in your hands fast and get you where you want to be.