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Why every business should do cash flow forecasting

19 July, 2018

Our content partners, Float, have written this blog to help business owners to understand how understanding and forecasting their cash flow can help them to run their business. Check out more about their cash flow forecasting software here.

Shockingly, 82% of businesses that become insolvent do so because of a cash flow crisis. But losing sleep over it isn’t necessary. Cash flow forecasting can allow you to count sheep again, not cash.

What is cash flow forecasting

Cash flow forecasting is the measurement of the inflows and outflows of cash in your business. It’s a barometer for your business; allowing you to confidently anticipate future cash gaps and surpluses. Having insight into your cash can allow you to make strategic decisions.

Simply put, it shows you how much cash you have now and in the future.

There are two ways to create a forecast. And how you run your business determines which method you use. The indirect method is traditionally the most popular, but the direct method provides more accuracy for short to mid-term use. There is no one correct way to forecast your cash. And employing both methods together increases insight into your cash position.

So, what exactly can having a deeper insight into your cash do for you?

Spot a cash gap before it’s too late

Establishing a successful business can be a struggle. But by keeping an eye on your cash flow you can establish ways and means to keep you afloat long enough to see your business become a success.

A cash flow forecast works like a GPS for your business management systems. It can show you where you are, and where you’re going. Understanding the road of your business can help you to handle all the twists and turns that come your way. With visibility into potential pitfalls, you can put plans in place to avoid them.

Make the most of a cash surplus

Just as cash flow forecasting can help you to spot cash gaps, it can also help you to understand when your business is saturated with cash.

For any business to grow it’s vital to understand that cash in the bank means opportunity. By forecasting your cash you can see how much, and when, you can reinvest your hard-earned money.

A cloud-based tool like Float allows you to create a cash flow forecast in no time at all. With a visual means of viewing your cash flow you have enough time to do something about cash gaps before they become cash crises. Float pulls through your invoices and bills directly from your accounting software, making forecasting easier than ever, and saving you up to eight hours a month otherwise spent using spreadsheets. Promising less stress and a better night’s sleep, investing in Float can be the answer to your cash flow problems.

‘What if’ scenarios

Whilst forecasting can help you to understand where your business is going at any given moment, it can also show you ‘what if’ scenarios. Changing even the smallest thing in your business management systems can cause a knock-on effect in your business.

Factoring in the impact of a decrease in sales, the cost of a new employee, or that dream blue sky scenario can show you if your business can withstand the blow.

Secure finance

Understanding where cash shortages or surpluses may appear can allow you to apply for finance at the right time. Equally, insight into the potential of your business - through the analysis of different scenarios - can help you to see when is the best time to apply for funding.

Securing finance for your business before you need it can ensure that you get the best rates at the best time.

It is important to remember, finance is not just for businesses in a cash crisis. Growing businesses should also use funding options in order to continue to expand and invest in their chosen field.

Funding for your business can come in many forms. Applying for a bank loan, attracting new investors, or using a finance tool like Nucleus are all valid options. Cash flow forecasting can allow you the time you need to seek out the right funding option for you.

In conclusion

Cash flow forecasting is for your business present, and future. It allows you an increased insight into your financial systems to enable you to plan effectively and strategically.

Making better business decisions is vital to business success. If you know where you will be in a month, a year, two years, you will be able to plan to get there and know where you will stand when you do.

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