Advantages and Disadvantages of a Cash Flow Forecast
Cash flow forecasting is a method of estimating the movement of cash coming in and out of your business over a given period of time. Typically, business cash flow forecasting covers your next 12 months, but a short-term cash flow forecast could be calculated for just one month ahead to see if there’s an excess of money, or if additional funds are needed immediately.
Understanding your cash flow is essential for your business to enable you to plan how much cash you’ll need in the future. Cash flow forecasts can show you whether your business is fulfilling expectations, be adapted for planned changes of circumstance, and help budget for equipment or other purchases.
Need to know the advantages and disadvantages of a cash flow forecast? Read on…
Advantages of Cash Flow Forecasts
Proper planning will ensure that information is provided with regards to money expected from individual steams of revenue, and then compared to any expenses that need to be deducted. This data will indicate times when you can expect a surplus of cash, and when earnings may be tight and additional funding required.
Being able to predict the financial health of your business with accurate projections will provide you with a comprehensive forecast that factors in such things as changes in the marketplace and even political influences. This type of forecasting lets you calculate when you could expand your product range or need to employ additional members of staff.
Other benefits of cash flow forecasts include keeping track of overdue and late payments. Having insight into your customer’s payment habits will give you more control – and the time to create a plan of action to ensure that you give extended credit only at times that you can afford to. Consider taking deposits or asking for payment upfront to minimise any decrease in cash flow.
As a business owner cash flow forecasting also helps you to provide investors and shareholders with clarity for the future. This will cover multiple scenarios with straightforward information assessing when a different course of action may need to be taken. And it can be used by Directors to ensure that compliance and accountability are included as part of your business culture.
Accurate cash flow forecasting can also build strong relationships with your suppliers, and with your customers. Creating added value at specific times will improve loyalty, and avoid mismanaged connections which can have a disastrous effect on your liquidity.
See Some More Pros and Cons of Cash Flow Forecasts Here:
Other benefits and drawbacks of cash flow forecasting are shown below:
Helping to systemise your business is a major advantage. You can even choose to automate the process with the right software. There are many tools that can be used to generate a cash flow forecast to allow you to focus on other areas of your business, saving you both time and money. With the data available when you need it, producing a statement takes just minutes.
This allows larger businesses to raise levels of investor confidence and demonstrates a responsible business approach. It also helps you to identify future times of financial difficulty, giving you the opportunity to put funds aside during peak marketing periods.
The limitations of cash flow forecasts include being unable to account for changing costs, and the accuracy of when money comes into the business. Miscalculations will affect the business which could result in debt.
Cash flows don’t anticipate shifts in the marketplace or circumstances or events that can’t be anticipated and fall outside your control. This can sometimes give a false sense of security and adjustments may need to be made to ensure predictions are as close to reality as they can possibly be.
A degree of probability is always involved whether the internal data is accurate or not. The longer the forecast the more room there is for errors. And when assumptions are made with regards to inflation, interest rates, and taxes data can quickly become unusable.
A cash flow forecast doesn’t actually work without goals. If you don’t have revenue objectives to implement then the cash flow forecast becomes unintentionally inaccurate. For it to be precise there must be a mutual understanding of vision and organisation. And if it’s used as the only statement to look at the financial health of the business this may be a concern for the future.
Get Help from a Financial Analysis Professional
A virtual CFO (Chief Financial Officer) will provide you with Key Performance Indicators to determine the performance of your business. One of these is cash flow analysis, which you’ll be able to develop and improve with the help of goal assessments. Boosting the growth of your business and increasing your revenue are just two of the many benefits you’ll receive when you hire a financial analysis expert.