Entrepreneurs are faced with important financial decisions every day. Developing a deep understanding of your finances is crucial to seeing your business thrive. An important financial concept to understand and take advantage of is cash flow forecasting. Read on to learn about what cash flow forecasting is, and why it matters.
What Is A Cash Flow Forecast?
Cash flow forecasting is the process of estimating the flow of cash in and out of a business over a specific period of time. It is an essential business planning tool, helping companies prepare for future cash scenarios and efficiently manage cash flow. Ultimately, forecasting helps you determine how you’ll run and grow your business effectively.
The Advantages of Cash Flow Forecasting
1. Prepare for the unexpected
Cash flow forecasting protects businesses from unwelcome surprises, such as employees leaving or expected deals not panning out. Using scenario planning allows you to test for possible futures and better prepare for possible outcomes. You’ll be better prepared to roll with the punches and develop strategies to deal with the unexpected.
2. Track Spending
Forecasting allows you to see the breakdown and impact of your budgeting. Whether over or under budget, seeing the movement of cash into and out of the business can help to increase accurate budgeting and meet future revenue goals.
3. Overdue Payments
It’s important to keep track of late payments and how they impact your bottom line. You can also plan for upcoming cash gaps and put a plan in place before they become an issue.
4. Manage Surplus
Knowing when you’ll have surplus cash means you’ll be able to manage it wisely. Using additional cash for reinvestment in new markets, or for the repayment of loans, can be essential to helping your business thrive.
5. Predictable Growth
Cash flow forecasting fosters predictable growth. Since cash flow forecasts help businesses plan their cash surpluses more effectively, they also make it easier to execute a growth strategy in a more predictable way and avoid costly surprises.
6. Debt Repayment
Debt repayments are often large cash outflows that need to be planned for. Cash flow forecasting can help businesses that are in debt ensure they have the cash on hand to make those payments each time they’re due.
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