For new and growing businesses, cash flow forecasting is an important process, but what exactly is it? Cash flow forecasting is the estimation of the flow of cash in and out of a business over a set rate of time. Cash flow forecasts generally cover a year, but in some cases, they cover shorter periods of time.
Not only does cash flow forecasting help businesses to determine what their future cash positions will be, but it also helps them to understand how long their cash will last so that unnecessary spending is avoided and sound decisions can be made for the investment of any surplus.
Creating a Cash Flow Forecast
How a business creates its cash flow forecast is highly dependent on the needs and goals of the organization. The first step in its creation should be determining what it will be used for. Will the data produced be used to plan for short-term needs or long-term expansion planning? Is the organization figuring out how to reduce debt or avoid future cash shortages?
Once a business knows why they are forecasting, it’s important to determine the length of time that the forecast will cover. A weekly cash flow forecast could look very different than an annual one.
Before an accurate cash flow forecast can be reviewed, the business must determine the best source of financial data. Reports generated through accounting software, along with information from bank accounts, accounts payable, and accounts receivable are usually the best places to start.
What’s Next?
There are many reasons that businesses need consistent and accurate cash flow forecasts. Whether the goal is to pull its way out of debt or to plan for sustainable growth, having a clear understanding of the resources that will be available is vital.
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