Why Is Cash Forecasting Essential to Your Growing Business And How To Build It?

Clémentine d'Arjuzon

Mar 3, 2022

Summary

What Are The Benefits Of Cash Flow Forecasting? How To Make Accurate Cash Flow Forecasts? 

When it comes to business, cash is king. Being able to predict accurate cash flow is helpful for any company, as it helps your decision-making for long-term success.

Cash flow forecasting is a projection of your future cash available, by calculating the timing of your future cash inflow and outflows.

It’s useful to know the amount of cash that will get in and out of your business over a given time period. With this information, you can plan ahead and adjust your strategy. 

The difficulty with cash flow projection is to actually calculate it. There are many data sources to compile, and they all need to be relevant for your result to be accurate. Without the right tool, this process can be tedious - although it is possible to break it down in: cash inflow and cash outflow.

That’s where we come in: Upflow, our in-house Accounts Receivable software, now offers a cash inflow forecast feature! Based on your previous sales and your past collection speed, this automated process can give you an accurate cash inflow forecast easily. 

Whether you already use a tool or not, read on to discover the benefits of cash flow forecasting. We also share details on how to calculate your own cash flow projections for your B2B scale-up.

What Are The Benefits Of Cash Flow Forecasting? 

Knowledge is power. Apart from making a great quote, this statement couldn’t be truer for cash flow projections. Any business and business owner, but especially a fast-growing one, needs accurate cash flow forecasts. Here is why: 

Better Cash Management: 

Cash flow forecasting helps determine if you have too many cash outflows compared to your cash inflows - before it becomes a problem. You might have record sales coming in, but if you don’t have enough cash, you will be in a challenging situation. 

On the other hand, knowing if you have a surplus of positive cash flow ahead will help you make the most of it. You could be earning returns on this extra liquidity or using it for debt repayments.

Problem-solving: 

Having accurate cash flow forecasts means you’ll be able to take action in time to course-correct, should any problem arise. 

If a negative cash flow arises from your cash flow forecast, for instance, you might double down on your accounts receivable efforts. Indeed, it could be the perfect time to optimize your A/R collection process with automation.

Even in a fast-paced environment, it is good to be able to fix situations ahead of time, before they become a real problem. 

Stakeholder Satisfaction: 

There is a reason investors ask for regular cash forecast reports with your business plans. They know your cash flow management can make or break your business

Depending on the stage of your business, investors might be looking more at your cash inflow or your burn rate (cash outflow). 

Being able to produce cash flow forecasts quickly and accurately shows you’re making it a priority. 

It’s also a good way to ensure that your employees will be paid on time every month - which is best for talent retention. The same goes for your suppliers. You could even get discounts on your Accounts Payable by paying your invoices early. 

Forward Planning: 

With the best data, you can make the best decisions. Knowing your cash positions in advance means you can plan for your growth. You can adapt to the reality of your negative or positive cash flows with short-term and long-term strategies. 

All in all, cash flow forecasting helps your B2B fast-growing company get accurate long-term forecasts and establish a well-thought-out strategy to foster your growth. If you’re a CFO, it will make your decision-making and budget planning easier and more efficient.

Now you know some of the benefits of cash flow forecasting, you probably want to know how to make accurate cash flow projections for your business.

Need help to calculate your top A/R metrics? Download our free spreadsheet!

How To Make Accurate Cash Flow Forecasts? 

Manual methods to calculate your cash forecast

To calculate your cash flow forecasts, start by choosing a time period. Budgeting exercises and forecasting exercises are either done on a quarterly or yearly basis, depending on the size of the company.

At Upflow, our finance team does it on a yearly basis, but public companies for instance do it on a quarterly basis, as their stakes are much higher. 

Once you have chosen the time period that suits your needs, you can move onto the method you’d like to use. 

There are two ways to calculate your cash flow forecast:

  • The direct method is based on the precise moment when your cash is projected to come in and out of your business’ bank account. 

You get it by subtracting your expenditures from your receivables. Although it is quite straightforward, it can be time-consuming for companies with a high volume of transactions or the ones using accrual accounting. The direct method tends to be used for short-based forecasts and/or small businesses that use the cash-basis method.

  • The indirect method on the other hand is more widely spread. It relies on your profit & loss statement and your balance sheet, so it uses data that has already been recorded. 

To translate it into a cash flow forecast, the net income is adjusted with the operations that affect your profits but not your cash flow. It is easier to compute high volumes of transactions with this method and produces longer time forecasts.

As they serve different purposes, both methods tend to be used in conjunction. Regardless of the method you choose, you will next need to gather the data needed to calculate your cash flow forecast, namely: 

  • Your cash balance at the beginning of the selected period,

  • Your forecasted cash inflow over the selected period, by type,

  • Your forecasted cash outflow over the selected period, by type.

As a starting point, you can use the data from your balance sheet and bank account. Add to this your planned cash inflows from sales and your A/R. Subtract your projected expenses (remember your A/P!). And there you have it: your cash flow forecast. 

Use automated tools to calculate your forecast

In essence, it is simple to get a cash flow forecast. In practice, having an accurate cash flow forecast can be a challenge: computing all this data takes time to do. 

That’s especially true if you’re doing it manually, using excel spreadsheets. You have to compile different sources while ensuring all the data you are selecting is accurate. And that’s without the human-made errors that can easily get in the way.

For B2B companies with different offers, subscription plans, and payments plans… it can become a nightmare. 

Your best option to compute accurate cash flow forecasts is therefore to use an automated tool that integrates with your accounting software. For one, the risk of error is lessened. Automated forecasts also free up your schedule and leave you more time for the actual analysis of your forecast and planning for your growth. 

Convinced? Then consider giving Upflow a try! We have just released a cash inflow forecast feature (picture above). Based on your previous cash collection rate, you can get a cash inflow projection for the next 6 months

The best part: it’s all done for you automatically with your latest data. With these accurate cash inflow reports at your fingertips, you can focus on what really matters: strategic decision-making for your future growth.

Key Takeaways

As a scale-up, cash forecasting is essential. It’ll help you prepare for your growth, solve problems before they arise, and keep your stakeholders happy. It also means better cash management for the short-term and long-term future. You’ll know at any given time the actual cashflow of your company.

While cash flow projections are easy enough to calculate on paper, in reality, they can become quite tedious and error-prone. Being a CFO of a scale-up business, your time is too valuable to use spreadsheets (or paper). In order to be efficient and accurate, we advise using an automated tool. 

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