Four Tips for Accurate Cash Flow Forecasting for Your Business
By Space Coast Daily // June 6, 2022
As a business owner, you understand the importance of cash flow forecasting. Accurate forecasts give you an idea of how much cash you will have in the future and when you’ll run out of money. But how do you ensure that your forecasts are accurate? Using cash flow forecasting software is a great start, but here are four other tips to improve your forecasts.
1. Create A Comprehensive Cash Flow Statement
If you want your cash flow forecasting model to be accurate, then your cash flow statement must be comprehensive. Forecasts can only be as accurate as the data you use to create them, so make sure that you have all of the correct information.
Your cash flow statement should include:
■ All cash inflows from all sources, including external investments
■ All cash outflows, including operating expenses, costs for other business activities and investments
The more detailed and comprehensive your cash flow statement, the more accurate your cash flow forecasts will be. After all, you can only create forecasts using the existing data you have for your income and expenses. If you leave any expense or income source out, you won’t have an accurate cash flow forecast.
2. Use Accounting Software and Cash Flow Tools
One quick and simple way to make your cash flow forecasts more accurate is to use software. Accounting software can sync with your business bank account and other accounts to automatically and accurately determine your income and expenses.
An automated cash flow forecasting tool can use data from your existing accounting tools to minimize errors and ensure that your forecasts use the most up-to-date data. In addition, you can find tools that integrate with your preferred accounting software for easy installation with minimal training. For example, you can find cash flow software for QuickBooks, Xero, Excel and more.
Accounting and cash flow software will save you time while reducing the risk of errors and ensuring that your cash flow forecasts are highly accurate.
3. Set Up a Payment Collection System
One of the biggest issues with creating accurate cash flow forecasts is that payments from clients or customers may not always come in a timely manner.
Maybe you struggle to send out invoices quickly or you have customers who don’t pay on time. You may include these invoices in your income, but if they aren’t paid in full, your cash flow forecasts won’t be accurate.
One simple way to overcome this issue is to set up a payment collection system. Make it as easy as possible for clients or customers to make payments online. Additionally, you can set up an automated invoicing system to ensure that your customers are paying as quickly as possible.
Give your customers multiple options for making payments, such as:
■ Online payments (such as through PayPal or another payment processor)
■ Credit and debit cards
Additionally, make sure that customers or clients understand when payments are due. Generally, businesses give customers 30 or 60 days to make payments before they begin collecting late fees or assessing other charges. Make sure that you clearly communicate payment due dates and terms so that there is no confusion.
If customers fail to make payments, consider initiating collections proceedings.
Having a clear and established payment collection system can help ensure that customers are billed on time and make payments on time. This alone will help improve the accuracy of your cash flow forecasts.
4. Ensure Departmental Collaboration
If you want to create accurate cash flow forecasts, everyone in the business must be on board and participating. Ensure that all departments are collaborating and are on the same page to ensure that your projections have the most up-to-date and accurate figures.
While departments set budgets at the start of the year and operate within this budget, the company’s needs may change. For example, a department may need new personnel, software needs may change, or other things may come up that need to be addressed. These changes can affect the accuracy of a cash flow forecast, which is why every department should be reporting and collaborating to ensure these changes aren’t overlooked.
Cash flow forecasting helps you gauge the financial health of your business, but creating accurate forecasts isn’t always easy. Use these four tips to ensure that you’re using the most up-to-date data in your projections.