Cash is king. It may be a cliché in the finance world, but it’s true. A business needs a healthy flow of cash to thrive and the best way to monitor money going in and out of the business is with a cash flow forecast.
But why is a cash flow forecast so important? And how can cash flow forecasting positively impact your business?
Understanding the role the cash flow forecast plays in your finances is so important, which is why we’re sharing the top cash flow forecast benefits to help drive sustainable business growth.
In this blog post, you’ll learn more about seven key advantages of a cash flow forecast including:
7 benefits of a cash flow forecast
1. Forecast future cash shortages
One of the best benefits of a cash flow forecast is the fact it can be used as a helpful tool to identify and plan for cash shortages. Cash forecasting shines a spotlight on cash gaps before they become a problem.
Having this knowledge in advance gives you ample time to act before the cash shortage hits your business. Preventing cash shortages from damaging the business is crucial to ensure long-term financial health.
2. Use scenario planning in your cash flow forecasting
There are many ‘what if’ scenarios that could impact the business and the bottom line. While you can’t prepare for every possible outcome, you can use cash forecasting to build plans to help navigate potential events or situations that could impact the business.
Modeling hypothetical business scenarios gives the business a heads-up in the sense that it allows time to plan and act accordingly to avoid risk and seize opportunities as they come.
3. Monitor business expenditures more accurately
Keeping track of business expenditures is no easy task without the right tools and processes in place. However, a key benefit of a cash flow forecast is that it creates a clear picture of cash coming in and going out of the business over a given period.
With a cash flow forecast, you can monitor spending more accurately and across different departments. Having one place to see all of that information makes it a lot easier to pinpoint areas where the company is overspending and find opportunities to cut costs when necessary.
4. Track late payments and payers
There’s nothing more frustrating than tracking down late payments and the customers behind them. When customers repeatedly pay late, it can knock your company’s cash flow, which will be reflected in your cash flow forecast.
Rather than sifting through stacks of invoices and data trying to find the culprit, a cash flow forecast helps you identify late-paying clients without all the hassle. You can then decide how to approach the situation to help prevent late payments from leading to negative cash flow.
5. Support decision making
With better data, comes better decisions. On top of helping you understand the potential risk or opportunities of certain situations, a cash flow forecast can also support the decision-making process throughout the organization.
Having accurate financial information presented in a cash flow forecast is useful when it comes to deciding whether to invest, cut costs, or push a specific business venture.
6. Allocate cash surplus more efficiently
If your company has excess cash in the bank, a huge benefit of a cash flow forecast is that it helps predict when surplus cash will be available. The business can then plan what they want to do with the surplus, such as reinvest it in new markets, pay back a loan, etc.
7. Better manage FX risk
A reliable cash flow forecast will be one of the best tools at your disposal when it comes to mitigating risk connected to foreign currency. You can use it to not only anticipate evolving cash needs, but it’s also useful to better understand a company’s exposure, reduce foreign currency transactions where necessary, and plan for mitigating risk related to FX.
There are so many advantages of a cash flow forecast that you really can’t afford not to have one. From monitoring fluctuations in cash flow and predicting future financial impact, a cash flow forecast is a powerful asset for any business.
Having a clear understanding of your company’s cash flow is vital for continuous growth and preparing for potential issues before they become a present-day reality.
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