The Five Vital Components That a Good Cash Flow Forecast Must Have
Not sure where you stand and where your business is heading? A cash flow forecast can give you a good idea.
Before listing the components of a cash flow forecast, it’s crucial to understand the concept of what this kind of forecast is. Essentially, it’s a vital tool that helps you understand your finances.
To be precise, a cash flow forecast is an estimation of how much money comes in and goes out of your company. And it can be as detailed as you need it to be and for whatever period.
But for a cash flow forecast to be useful in any business, it needs to have the following components.
This is what all cash flow forecasts depend on.
A good way to come up with projected sales figures is to look at historical data. You must use seasonal patterns, promotions, market trends, and past figures to estimate future sales.
But if your company is new, it’s possible to make sales projections from competitor, supplier, and industry data.
Every business has expenses, including rent, insurance, manufacturing, and others. That’s why it’s a key component when making a cash flow forecast.
It’s essential to have a firm understanding of what goes out of the company for the next month or year, depending on the term of the forecast.
Projected Outgoing Payments
To make an accurate cash flow forecast, you must know when payments have to go out. Make sure to check with suppliers, vendors, investors, banks, and service providers.
Include that information in the forecast to know exactly when you have to pay more. It should also give you a good idea of any delayed payments.
Projected Incoming Payments
When working with repeat customers and clients, it’s easy to see patterns with your cash inflow.
Look at historical data to see how people pay and identify how many of your customers pay upfront. You also have to figure out how many of them delay payments or perhaps often pay late fees.
Knowing when money comes into your business will help you make a more accurate cash flow forecast.
Communication and Good Software
Working with numbers isn’t as hard as it used to be, thanks to all the technology available today. That’s why software is a vital component when it comes to making a cash flow forecast.
Of course, the accuracy of a forecast also depends on communication between various individuals and departments. If people don’t input the right numbers and ignore concerns or inefficiencies, you will end up with bad information in your database.
Although cash flow forecasts rely on numbers to give you the desired projection, those numbers come from people. That’s why having clear lines of communication in a business can help ensure the accuracy of the data that you work with.
Don’t Sleep on Projections
You can’t rely on a single cash flow forecast for the whole duration of the business, especially if it’s a longer-term one. Lots of things can happen from year to year and month to month. And a forecast that looked promising two months ago may not hold true two weeks from now.
That’s why it’s critical to create one early on, ideally at the start of every financial year. As you proceed, revisit the projection and adjust accordingly since cash flow forecasts are flexible.