Cash flow forecasting is an integral part of a CFO’s job, as a company’s positive cash flow is essential for meeting its financial obligations and funding priorities. Companies often rely on cash flow software solutions to predict their financial resources accurately. To understand these solutions better, it’s important to comprehend what cash flow is and why it matters.
Cash flow forecasting is the process of projecting a company’s incoming and outgoing cash flow over a period. The result of this forecast is a cash flow report, which details how much money a company expects to take in and spend over a given timeframe. This report is a useful tool for making monetary, capital, and financial decisions.
Accurate cash flow projection enables companies to estimate their future financial balances, avoid cash shortages, and make the most of any cash surpluses. That said, accurately predicting cash flow is complex as several variables, such as sales, expenses, seasons, etc., can impact it. Hence, it’s essential for firm owners to make business forecasts that estimate cash on hand 12 to 18 months ahead.
Cash flow forecasting can either; be done over a variety of time periods, an example from Taulia illustrates a one-month cash flow prediction for January. Net cash flow is calculated as the difference between total inflows and total outflows.
Improving cash flow forecasting technique is essential to achieve business goals and meet management and investor demands. Budgeting and forecasting software are essential tools for budgeting your business activities. However, three crucial steps to keep in mind throughout the process include; identifying and addressing the primary reasons for inaccurate forecasting, adopting best forecasting practices, and replacing spreadsheet-based forecasting with an automated tool that has built-in intelligence.
Cash flow forecasting is not only essential for avoiding cash shortages; it also helps businesses pay off their debts faster, adhere to debt covenants, and develop more predictably. However, most inaccuracies stem from poor resources lack of communication and no single forecasting methodology.
To improve cash flow forecasting and limit negative cash flow, businesses should plan for seasonality, evaluate fixed and variable expenses, use real-time project management software to eliminate silos, and focus on data standardization. These tips can help CFOs impress their board and deliver better results.