Cash flow forecasting is an important process. It's used to estimate the flow of cash that comes in and goes out of a business over a set time period. When it's accurate, it makes it easier for a business owner to predict future financial positions.
By making those kinds of predictions, the owner of a business is better able to avoid cash shortages, and invest surplus cash effectively. Naturally, both of those areas are valuable to a company, whether it's been around for a long time or it's just getting started.
Who Handles Cash Flow Forecasting for a Business?
A company's finance team typically handles cash flow forecasting. They aren't the only ones involved in building the forecast, though. There are plenty of other teams in the company that need to provide input and information, so the forecast can be as accurate as possible.
An inaccurate forecast for cash flow doesn't help anyone, and could even be detrimental to the company's bottom line or future success if you follow it, and it leads to financial issues.
Larger companies may get input from a lot of different stakeholders, while smaller companies won't have as many. Even a new, small company will have input from a variety of sources, though.
It's vital that all the stakeholders and other players in the company are included if the input they provide could affect the forecasting. Without that inclusiveness, critical pieces of the cash flow puzzle could be left out of the forecasting.
What's the Best Way to Forecast Cash Flow?
There's no perfect answer to the question of the best way to forecast cash flow. Every business is different. How your forecasting is created and developed will depend on the information you have, what your investors are looking for, and the objectives of your company as a whole.
If you have a small business in the IT sector, for example, you may not forecast your cash flow the same way as a large company in the industrial sector. Making sure you're doing what works for your needs is important.
You also need to take a look at what you're trying to accomplish with your forecasting. Are you looking into having enough cash for weekly or monthly debt repayment?
Are you trying to show yourself at a positional advantage for the quarter, or for the year? Those are two very different objectives, and they're going to affect the kind of cash flow forecasting you do at your company. In order to create the best model for forecasting your cash flow, you'll want to:
- Determine the most important objectives of your forecasting
- Choose the time period you'll be working with
- Select the method (either direct or indirect forecasting)
- Collect the data you're going to need for a complete forecast
Once all of that has been done, your finance team can get started on the actual forecasting. Because they'll be clear on the objectives and understand the time period and method, it'll be easier for them to develop a forecast that will provide your company with the right kind of information for the future.
Good data is vital, but it only matters if you make sure that the ways it's being used are going to benefit your business in the end. Even the best data can be useless if it's mishandled.
Are Short-Term or Long-Term Forecasts Better?
Much like the question of the best way to forecast, there's really no definitive answer here. Both short-term and long-term forecasts can be extremely valuable to a business, depending on how they're used and the objectives the business has.
If you're looking at a lot of immediate issues with your cash flow, then a short-term forecast could be a better choice. However, long-term predictions can also be very useful, so there's a place for those, as well. Ideally, having both can provide a more comprehensive picture.
How Can a Business Owner Use Forecasting?
Business owners use cash flow forecasting in all kinds of ways. From comparing themselves to where they were in the past, to look at whether they can (or should) take on additional debt, there are a lot of different ways to use forecasted information.
If you want to grow your business, forecasting can help you see your way forward. But it's also a good choice for issues such as planning how to pay back debt, looking into buying new equipment, or determining whether to hire more employees.
What's the Bottom Line for Your Company?
The bottom line for your company and others is that cash flow forecasting is an important way for you to get valuable information about the current health of your company's finances. It's also an excellent way for you to take a more careful look at what you want to do in the future, so you can keep your company strong and thriving as you grow and make changes.
By working with your finance department to provide an accurate, quality cash flow forecast, you can also experience a great sense of peace of mind.
