A winning cash flow forecasting plan is accurate and reliable. Granted, cash forecasting isn’t the most glamorous part of the role of a finance professional, but it’s vital for business continuity.

When done well, a cash flow forecast will accurately estimate money flowing in and out of the business over a set period of time.

If you want to improve your cash flow forecasting techniques, keep reading to discover five tips to help you do just that.

In this article, we cover:

What is cash flow forecasting?

A cash flow forecast is essentially a document that estimates how much cash is coming in and out of the business. It also includes projected income and expenses, typically covering the next 12 months. However, you can also use cash flow plans for shorter periods, such as a week or a month.

If you want to identify funding requirements or excess cash in the short term, performing a cash flow plan covering 30 days is the best option.

On the other hand, if your goal is to predict future sales, you may want to expand the cash flow forecast to cover between one month to one year ahead of time.

Cash flow forecasting techniques - tip
Note: Short-term cash flow forecasts tend to be more accurate. The longer the time period of your cash flow forecast, the less accurate the results are (in most cases).

Why is cash flow forecast important to a business?

Cash flow forecasts are vital to helping steer business decisions in the right (and most profitable) direction. By predicting cash flow, businesses can better prepare for potential cash flow issues and come up with a strategy to deal with them.

The more accurate your cash flow forecasting techniques are, the better. Here are a few more reasons why cash flow forecasting is so important to a business:

  • A cash flow plan reveals whether the business is meeting expectations and if not, what areas need some work.
  • You can predict the impact of potential best and worst-case scenarios and come up with a plan should one (or more) of those scenarios happen.
  • Cash forecasting helps you identify upcoming expenses.
  • Keep track of overdue payments and plan for cash gaps.
  • Track whether company spending is on target, break down your budgeting and make adjustments where needed.
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How to improve cash flow forecasting

1. Create different best-case and worst-case scenarios

Building a variety of cash flow forecast scenarios is a great way to prepare action plans should your company experience any financial deviations.

Of course, you can’t plan for every possible scenario (such as natural disasters, geopolitical tensions, or global pandemics). But preparing for different scenarios will give your company a good foundation to work from and help you to create more accurate and reliable forecasts.

2. Decide how far in advance you want to plan

Your cash flow plan can cover anything from one week to many months. Your cash flow forecasts must be adapted for specific timeframes, so you have to decide whether you’re forecasting short, medium, or long-term.

Start-ups probably won’t have enough data to plan far out, which can lead to inaccurate predictions. In most cases, using short-term cash flow forecasts is the best choice for newer businesses.

On the other hand, established businesses will have an easier time forecasting further out since they’ll have data that articulates a predictable sales pipeline, making future forecasts and predictions more likely to be accurate.

3. Leverage automation

Save time (and your sanity) by consolidating cash flow data in one place using automated technology. Manually inputting data into spreadsheets is a time-consuming process where human error thrives.

If your company hasn’t invested in automation yet, consider implementing cash flow forecasting software to help improve cash flow management by automatically collecting and sorting data.

Tip: You can use automatic reminders to alert stakeholders and teams that the deadline is approaching to contribute to the cash flow forecast.

This is particularly useful if you rely on others to provide cash flow data to help ensure the timely and reliable completion of your forecasts.

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4. Make sales forecasting a regular process

Forecasting sales is important to help create accurate cash flow forecasts that reflect the current state of cash revenue. Take the guesswork out of the equation and start relying on precise sales data to help gain a better understanding of the company’s sales cycle.

Sales and revenue forecasting will lead to more efficient and effective cash flow predictions. With this type of forecasting, you can identify things like how many customers are likely to churn and how much cash the company can burn without leading to liquidity risks.

5. Working capital optimization

Working capital management is a vital part of cash flow forecasting. So, make sure that you have a solid grasp of your company’s current assets, accounts receivable, accounts payable, and how much flows in and out – and when.

Optimizing working capital is one of the most effective ways to improve cash flow forecasting techniques because it gives you clarification on your projected cash positions over the next few weeks or months.

Key Takeaways

✔️ Short-term cash flow forecasts are more accurate while long-term cash flow forecasts tend to be less accurate (particularly with newer businesses).

✔️ Develop different cash flow forecast scenarios and prepare action plans should your company experience financial deviations.

✔️ Consolidating cash flow data in one place using automation saves time and leads to more accurate cash flow plans.

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