Running a business can be full of stresses and strains. Not only do you have to worry about managing people, getting your marketing right, and developing your product, but you also have to be constantly thinking about your finances. A steady stream of cash is vital to keep your business running smoothly, pay your bills on time, and keep your employees happy, and this can quickly turn into anxiety if they are uncertain about where their cash is at any given moment.
Cash flow problems are one of the most commonly cited reasons a business fails. It doesn't matter how great your idea is. If you run out of cash or credit, the dream is over.
The solution to this problem is to implement cash flow forecasting to tell you how your business is doing. Furthermore, it also helps you make better decisions.
Cash flow forecasting and cash management are essential concepts to master if you want to survive. If you have accurate projections, you always know where you stand. From there, you'll be able to make better decisions that contribute to responsible and sustainable growth.
What is cash flow forecasting?
Cash flow forecasting estimates the money coming in and out of business during a fixed period. These types of projections are a fundamental aspect of cash management, as you can anticipate potential shortfalls or surpluses and plan accordingly.
Essentially, cash flow consists of the sum of inflows and outflows — or cash in and cash out. Inflows are money generated from sales and revenues; outflows are expenses like salaries, rent, utilities, taxes, etc.
If you compare the two numbers and your inflows are greater than your outflows, your business is cash positive. However, if your outflows exceed your inflows, your business is cash negative.
Negative cash flow isn’t necessarily a sign that your business is in trouble. However, it’s not a state you want to be in for too long.
Knowing where your cash is at all times is just as important as forecasting your cash flow. You need to have a clear understanding of how much cash you have on hand, how much is owed to you, and how much you owe to others. This information is essential to make informed decisions about spending, hiring, and investments.
Benefits of cash flow forecasting
Cash flow forecasting has lots of benefits. These projections are run over different time periods, such as:
- Short-term forecasts (30 to 60 days)
- Mid-term forecasts (12 months or to the end of the fiscal year)
- Long-term forecasts (Over 12 months)
Here are some of the reasons why cash flow forecasting is crucial for businesses:
It helps you identify cash shortages
Accurate cash flow forecasting helps you identify upcoming moments where you will be cash negative. When you have this information, you can plan for these scenarios and mitigate their disruption.
If the last few years have taught us anything, it’s that we don’t know what is around the corner. Preemptively Identifying cash flow problems allows you to adjust and adapt. For example, it can help you know when you:
- Need to access a loan
- Sell assets
- Review your payment collection strategies
It helps you use cash flow surpluses
The opposite side of the coin is that cash flow projections also tell you when you are running a cash surplus. When you know you have excess cash ahead of time, you can start to think about how to use the money wisely.
Keeping cash sitting in your account isn’t always the best idea, especially in these inflationary times. You can invest your surplus in various things, like staff, equipment, or other activities that can generate company growth and revenues.
It helps you make data-driven decisions and use scenario planning
Cash flow forecasting has been revolutionized by modern cloud-based forecasting software. A compatible range of expense tracking apps helps businesses have always-on, accurate, current information about their cash flow. These tools make cash management far more straightforward than manually updating your accounts via spreadsheets.
Additionally, good cash flow forecasting allows you to run and plan for various scenarios, like business disruption, a loss of clients, or any other catastrophic event.
It helps you attract investors
Finally, cash flow forecasting lets you demonstrate to investors how your business is doing. If you are a startup looking for VC funding, this metric can be a huge help.
Similarly, if you are a business that has big plans or even requires a line of credit from a bank or creditor, cash flow projections can help you secure a loan.
How to unlock the benefits of cash flow projections
It should be pretty clear by now why cash flow projections can help you run your business optimally. However, many small to medium-sized business owners are experts at running a business but struggle with the accountancy aspect.
Thankfully, there are lots of options for business owners who want to get on top of their cash management.
Regular Cash Flow Analysis and Cash Flow Forecasting
Analyze your past income and expenses and project future income and expenses. This process can be done manually or using specialized software. Once you analyze your cash flow by creating a cash flow forecast, you can adjust your spending and investment decisions accordingly
Monitor your Cash on a Weekly Basis
Monitoring your cash on a weekly basis is essential to ensure that you are not overspending or running out of cash. You can do this by keeping track of your cash balances, outstanding invoices, and upcoming bills. You can also set up alerts to notify you of any unusual or unexpected cash movements.
Use Cash Flow Forecasting Software
Using a cash flow management and forecasting software can make it easier to keep track of your cash flow and cash balances. Dryrun is a perfect example of this!
Regularly review and update your cash flow forecast
Your cash flow forecast is not set in stone. As your business grows and changes, your cash flow forecast will need to be updated to reflect these changes. Regularly reviewing and updating your cash flow forecast can help you anticipate potential cash flow problems and plan accordingly.
How Dryrun Can Help You Forecast Your Cash Flow
Dryrun is an invaluable tool for business owners that helps them navigate the challenges of lumpy cash flow. With its data-driven approach and ability to provide an instant read on the health of the company, Dryrun offers a logical and illustrative way to manage finances and ensure a good night's sleep for business owners.
With Dryrun, you can see exactly where your cash flow is headed. We look at your revenue, your bills, and your expenses, and we bring them all together in one single, clear view of your finances, allowing you to have the visibility you need to be able to forecast ahead.
If there are any issues with your cash flow, you will be able to easily see them, fix them, and sleep soundly knowing that you have taken the steps necessary to make sure your finances are healthy and stay healthy.
Implementing cash flow forecasting and knowing where your cash is at all times is essential for business owners. By doing so, you can make informed decisions about spending, investments, and hiring, and avoid cash flow problems that can cause stress and anxiety. With a clear understanding of your cash flow and cash balances, you can sleep better at night knowing that your business is financially stable and secure.
Fight 'Feast or Famine’
Model the future of your cash flow, sales and scenarios in a single source of truth, to smooth out your revenue and achieve a steady stream of income.
Spot the peaks and valleys ahead of time so that you can adjust your capacity, backfill sales, and pick and choose the best projects, generating more money with the same team.