Cash flow forecasting, also called a cash flow budget, estimates how much cash an organization will have coming in and going out over a set period. It is in growing demand among banking and finance firms looking for better ways to plan ahead. This article explains what a cash flow forecast does and why your business needs one.
What is cash flow forecasting?
A cash flow forecast estimates the cash an organization will work with, usually over a year. It can also cover a few weeks or months, or more than a year.
If your cash in and out swings widely from one month to the next and you struggle to keep track of investments and spending, consider adding a cash flow forecast to your weekly meetings. It helps you watch the money coming in and going out, and it also shows how much you can invest and how long your cash will last. The sections below set out the main reasons to forecast.
How does it help you plan future investments?
With good estimates of investments and other financial transactions, an organization can decide whether to take on new projects, hire new staff or set up a new department.
A forecast also shows how much cash you should keep aside for unexpected events or a market downturn. It highlights how much you may need for extra investments and where your estimated budget for the year could fall out of balance.
How does it help with rent, salaries and operating costs?
Alongside budgets for projects and marketing, a routine cash flow projection helps you estimate how much to set aside for employee salaries. Other costs, such as office rent, allowances, employee insurance and medical benefits, can also be drawn from the forecast.
This shows where you need to make adjustments and which areas will take the most money. A forecast can also show how new hiring will affect future investments and the organization’s growth.
How does it support loans and business growth?
Projecting cash flow helps you estimate how much you need to borrow to start or grow a small business. It also lays out how you will repay the loan.
Lenders use a well-prepared cash flow projection to judge your liquidity and how well your business is growing. A forecast also looks at changes in business patterns before the forecast year and predicts how those patterns will affect the business now and in the future.
Key takeaways
The main advantage of a proper cash flow forecast is that you can return to it whenever you need to and spot problems that could cause serious losses before they happen. With that warning, you can plan ways to avoid losses and reduce the impact of unpredictable events, such as weak market demand, a fall in market value, or new government and regulatory changes.
- Forecast cash for the year, and for shorter periods when cash swings widely.
- Use the forecast to plan projects, hiring and reserves for unexpected events.
- Build salaries, rent and benefits into the forecast to see where to adjust.
- Share a clear projection with lenders when you need financing.
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