WHY IS CASH FLOW FORECASTING IMPORTANT?
Are you new to cash flow forecasting?
You may be simply starting out, or have been managing your business for a while or more.
Business is usually filled with a lot of highs and lows and as a business owner you have to act smart and planning your future financial position comes with a huge responsibility. You need to be armed with the right tools to make that a seamless experience.
It’s time to get to know more about cash flow forecasting and how it’s an indispensable tool for your business or finances.
“We were always focused on our profit and loss statement. But cash flow was not a regularly discussed topic. It was as if we were driving along, watching only the speedometer, when in fact we were running out of gas.”
—Michael Dell, founder and CEO, Dell Technologies
You may want to hire new people, but don’t really know when exactly you need to expand your team. Do you want to start your next marketing campaign or launch your new product?
Are you looking at planning your budget for advertisement, marketing, and sales? How do you go about effectively doing it when you are just a start-up and have no experience?
You may have years of experience in business but are experiencing a financial slump and you need to know how you can estimate taking on a business loan and the monthly payments that you can handle.
The answer to the questions above lies in the art of cash flow forecasting.
What is cash flow forecasting?
You all have heard the term once and probably know one thing or another about it, but just to make things easier, let’s just get down to the basics and get it out of the way before we discuss the important stuff.
A cash flow forecast is an educated and calculated guess about how much money your company or business will bring in in the upcoming year.
At first, you might think how is this going to help you with anything other than planning your budget, but as you go deeper you will realize the many advantages of this intelligent practice. And this is exactly what this article is about.
- Attract investors. A powerful forecast – particularly with an integrated profit and loss, balance sheet, and cash flow – can provide support when raising finance. Whether you are an entrepreneur, or an established business, a comprehensive understanding of the future position of your business will build investor confidence that the investment can be managed responsibly and most importantly can help you convince investors and lenders that investing in your business is a lucrative and smart investment.
- Stop Molehills From Turning Into Mountains. By utilizing your accounting data for cash flow projection you are able to project future risk so your business is able to respond to challenges before they become a full-blown crisis. A cash flow forecast will allow your business to be proactive rather than reactive and will support the business to maintain best practices over time.
- Back Up Your Arguments. Cash flow forecasting is a key component of systems advocacy. Utilizing cash flow forecasts will help present a strong argument for systems change. Whether you are advocating to justify a decision to hire more employees to executives, or to drop profitable products that don’t contribute to the gross profit or increase the sales of other low-margin products that contribute more to the gross profit. Illustrating your argument through the use of cash flow forecasting data will allow you to demonstrate why changes are needed.
- Better management of credit. This is one of the best advantages of cash flow forecasting. It is very important when it comes to obtaining credit either for paying your employees or a new venture. This helps you negotiate better terms when you know when you will need credit.
- Get to know customers better. Valuable customer insight is one of the greatest benefits of cash flow forecasting. Analyzing customer patterns and sales data will help you predict customer behavior and future sales that will contribute to your company’s cash flow. By knowing your customers better, you can prepare your team likewise, leading to the development of better products and advertisements. You will also be able to price your products better. That is why you must know how much your customers are willing to pay for a particular service or product.
There are hardly any disadvantages to cash flow forecasts, but it is important to remember that it is only a projection. It can’t predict the future of your business with absolute certainty.
Nothing can do that.
Cash flow forecasting highly impacts a company’s future success and growth. It pays to have a reliable cash flow forecasting tool to work with hand in hand.
And that’s what Moolamore “is all about”.
