Cash Flow Forecasting Helps Business Owners

The impact of COVID-19 on businesses has been substantial and it has upturned the notion of “business as usual.” Many business owners have found that forecasting cash flow has helped them anticipate potential shortfalls and plan accordingly to cover difficult periods.

Cash flow forecasting, even in unusual times, offers your business several advantages. It enables you to avoid making rash decisions and protects your business over the long run. You can make informed business decisions based on the timing of your cash flows and adjust your future working capital needs before you actually need the funds. You can determine what credit terms to offer to customers, based on their payment history. As you identify and address late-paying customers, you can take action to obtain customer payments in a timely manner.

Some of the banking and financing benefits of cash flow forecasting include:

• Saving money over time by avoiding late fees and bank charges from overdrafts.

• Preserving your company’s good credit standing by reducing or eliminating late payments and overdue bills.

• Obtaining or increasing a line of credit before your business actually needs the funds to support operations.

• Paying down high-interest rate debt or investing excess cash to earn interest through vehicles such as liquid money market or sweep accounts.

Getting Started

Performing cash flow forecasting is easier than you might expect. There are many software programs and tools available such as QuickBooks, Pulse, Dryrun and Float, or you can even use a simple spreadsheet to track and plan cash flow. Cash flow tools can be linked to other business software such as the Hubdoc document storage program and apps such as Expensify and Bill.com.

Steps to follow to perform cash flow forecasting are straightforward:

• Start by determining the time period that best suits your business, such as weekly or monthly. This may depend on how often you bill customers, your payment terms, and how often you pay your company’s invoices.
• Begin with the cash balance held in the bank and add in anticipated cash receipts from customer payments, draws against your line of credit, cash credits, refunds, and other inflows.
• Subtract payments made for rent, credit cards, utilities, vendor payments, and other cash outflows.
• Your cash inflows should meet or exceed your cash payment requirements. If you foresee a shortfall, consider how you can address it by reducing expenses, pushing for faster customer payments or drawing on your line of credit.
• Extend your forecast at least two to three months into the future to establish a rolling outlook for the quarter. Update your forecast monthly.

Businesses need to access all the planning tools in their arsenal during the pandemic. Cash flow forecasting enables you to take a proactive stance and to better understand your future cash needs and potential spending gaps. Using cash flow forecasting will allow you to avoid surprises and make better business decisions.

Do you have questions on how your business can use cash flow forecasting? Please contact your ALL tax advisor or call us at 617-738-5200.