A Vital Component of Your Business’s Financial Health
The ability to understand and accurately forecast cash flow is essential to the long-term success of any business. In fact, research has shown that 82% of small businesses fail due to cash flow problems.[1]
Unfortunately, even with readily available technology, many organizations lack a robust cash flow forecasting strategy. And challenges such as limited data, technology constraints and the uncertainty of the future add to the difficulty of forecasting.
Fortunately, focusing on the following key functions can help improve the accuracy of your cash flow forecasts.
Revenue projections
Revenue projections play a key role in cash flow planning because they provide a forecast of future income. Without this vital piece of information, it’s impossible to predict whether your business will have adequate assets to cover expenses, plan for growth and make informed financial decisions based on future expected income streams.
In order to accurately forecast revenue, it’s important to gain an understanding of market trends, competitive landscapes and your business’s unique selling proposition. It’s also important to carefully scrutinize key assumptions about pricing, sales volume and consumer acquisition costs to help ensure accuracy as various inputs change over time. You’ll also need to make sure your data is hygienic and providing the information you need to run accurate projections.
Once your projections are in place, be sure to regularly review and adjust them as necessary to help ensure they continue to inform your business in the most accurate manner possible.
Expense management
Actively controlling your organization’s expenses directly impacts the amount of assets available to fund the daily operations of your business. Doing so, in turn, allows you to more accurately forecast your future cash needs and helps prevent unexpected funding shortfalls by making sure business spending remains within budget.
Proper expense management requires that you gain a granular understanding of all operating expenses, from salaries and wages to rent and marketing costs. Carefully analyze this information to identify opportunities for cost optimization while allowing enough flexibility in your budget to cover unexpected expenses as they arise.
There are several software applications that can help you set spend management guardrails while also enhancing your level of visibility and control:
- Capital expenditures –Capital expenditures, while vital to helping ensure the long-term success of many businesses, also have a substantial effect on a business’s short- and long-term financial viability. That’s why it’s important to carefully forecast and plan for future investments in equipment, technology and property. As you’re evaluating potential capital expenditures, make sure to prioritize those that have the largest potential impact on current cash flow and long-term growth.
- Working capital management – Managing your organization’s working capital can help you optimize the management of current assets, such as inventory and accounts receivable, as well as current liabilities, such as accounts payable. This helps ensure your business has enough readily available cash to pay for short-term operational expenses while minimizing the need to maintain unnecessary cash. To improve the efficiency of your working capital, it’s important to optimize inventory levels, actively manage accounts receivable and negotiate favorable payment terms with your suppliers.
- Scenario planning – Taking time to consider and plan for multiple potential scenarios allows you to prepare for various outcomes by creating multiple cash flow projections based on different conditions. Scenario planning can also help you assess your resilience to potential market disruptions and make informed decisions about your organization’s future. There are various applications that can help you aggregate and synthesize your forecasts and plays with capabilities that exceed those of Excel.
Your success with cash flow planning depends heavily on having access to the right information and truly understanding its implications. Remember that data has no agenda. It’s important that your interpretation of the data also be free from biases and preconceived notions.
Could you use help with your cash flow forecasting? Creative Planning Business Services is here for you. Our experienced professionals partner with clients to help them optimize all aspects of their organizations and drive success for their businesses. To learn more, schedule a call with a member of our team.
