We all know how important it is for businesses to ensure optimal flow of cash. The need for maintaining decent cash flow in business is now very necessary due to the pandemic that has been wreaking havoc since the last year.
The economy has still not recovered from the massive crash, and the GDP of a few nations have sunk below what had been predicted. That is why it is important that businesses pay attention to cash flow forecasting as well. But what is cash flow forecasting? We shall look into this answer and learn all that we can about cash flow forecasting in this article.
We shall try to find answers to why cash flow forecasting is required for businesses and how they can go about the same. Therefore, without any further delay, let us dive right into the topic and gain more insight into what cash flow forecasting is.
What is Cash Flow Forecasting?
We know what cash flow management is? It is the process of managing the amount of cash that flows in and out of a business. There are a number of factors that need to be considered while going about managing the cash flow of a business. Now, the textbook definition of cash flow forecasting or cash forecasting would be the process of analyzing and tracking the expected cash movements over a period sometime in the future. It is the process of forecasting and making educated guesses regarding how cash shall flow within a business setup.
Entrepreneurs tend to know their businesses inside out when it comes to forecasting the cash flow in their businesses. They know how much their products are going to make and how well their services are going to sell. They have a good overall understanding of their overheads.
However, there are a few things that entrepreneurs and business owners do not know when it comes to cash flow forecasting. They do not understand how their small sales and costs are going to affect their bank balance significantly. And that is why it is necessary to understand the different ways one can go about the process of cash forecasting.
The Importance of Cash Flow Forecasting:
So we have discussed in great depths and details what cash forecasting is in the previous section of this article. We shall now proceed to understand the importance of cash flow forecasting in every business.
The very first thing that we need to understand is that a company’s profit does not necessarily mean that a company has a certain amount of cash coming in at the end of each year. In fact, without the right means of cash flow forecasting, it shall be impossible to predict how much cash shall be coming in at the end of each month and what the company’s profit is.
Cash forecasting is also required to make informed and wise business decisions. It is crucial for a business to forecast its cash flow so that it knows how to enable further growth of the business and plan for certain necessary changes.
Three-Way Cash Forecasting:
So now that we know why cash flow forecasting is important for businesses, it is important for us to understand three-way forecasting. A three-way forecasting means forecasting a company’s profit, balance sheet and cash flow taken altogether.
It is important to forecast these factors all together since they are linked to each other in more than one way. If you have been wondering why a three-way forecasting is important, it is because some aspects of a business affect the balance sheet of a company. Without a three-way forecasting, it shall be impossible to track whatever goes in the balance sheet.
Some Efficient Tips to Go about Three-Way Forecasting:
The first tip that you must always keep at the back of your mind is that you must always compare your budget to the actual results.
The second thing to remember is that you must never forget about the expenditure that might not reflect on your business’s profit and loss.
Always remember to compare your budget with your actuals on a line by line basis and do so frequently. This shall make sure that you are up-to-date with any issues that might crop up with your spending and income. You shall be able to address these issues accordingly.
Summing It Up:
Cash flow forecasting is an integral part of any business. A business enterprise cannot rise to the heights of success and can neither analyze their cash flow optimally without forecasting. One of the most important models of cash forecasting is that of the three-way model.
With this model, a business can analyze its profits and losses and also have a look at whatever reflects on the balance sheet. Cash forecasting is crucial, and the sooner businesses understand this part, the better it is for them.