Having a good grasp on the cash coming in and going out of your business is a vital part of running it successfully. Cash flow forecasting gives business owners and leaders valuable insights that are key for decision-making.

Cash flow forecasts help mitigate risk and allow you to make better business decisions like if you can afford to open another location or if it’s time to implement a cash management system. We’re here to break down what a cash flow forecast is, how to do it, how to apply data analytics, and prepare you for challenges you may face.

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For any business, strategic and effective business cash management is the key to business growth.

What Is Cash Forecasting

In simple terms, cash flow forecasting is the estimation of how much cash will come in and how much cash will flow out of a business over a given period of time. This estimation of cash inflows and outflows is important for the overall financial health of the business, ensuring financial stability and helping to plan for future investments or operating expenses.

A good understanding of cash flow empowers decision-making of all kinds. For example, it can help businesses recognize when they have the financial stability to support hiring new employees. Alternatively, it can also highlight inefficiencies and when solutions like cash management automation could be used to improve the cash conversion cycle.

Why Cash Forecasting Matters

In addition to understanding the overall financial health of your business, future cash flow has many other benefits, like improved liquidity management, risk reduction, and support in strategic decision-making. During the process, you may find details about your business’s finances, like what bank fees you pay and other common charges, that you didn’t even know about.

Overall, preparing a cash flow forecast helps a company to avoid getting into financial trouble. The insight it provides to you and other business leaders is invaluable, allowing you to better plan for the future, reduce costs, become more operationally efficient, and make informed decisions about the direction of the company.

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ICL’s software-first CashSimple™ solution streamlines everything from change orders to tracking deposits.

How to Determine Cash Forecast

To get a projected cash flow statement that meets your needs, you’ll want to spend some time thinking through the business purpose and timeframe you want to look at. Those steps may seem simple, but they are the most important and will have a big impact on the accuracy of your cash flow forecast. Keep in mind that it’s not just internal factors at play; external factors like market conditions and regulatory changes can have an impact on cash forecasting for your business.

Determine Your Objectives

Before you start, ensure that you have clear and defined objectives for the cash flow planning. Maybe you are aiming to improve liquidity management, ensure you stay on top of any debt or want to secure funding for a future project. Whatever the objective is, this becomes the foundation to creating a cash flow and will guide the process from start to finish, getting you the results you need.

Choose Your Time Frame

Now that you have a clear business objective for the cash flow forecasting model, it will inform the time frame you investigate. If your business is short on cash and needs provisional credit, you will likely be looking short-term to really focus on daily and weekly cash flows for liquidity planning. If you have a future project or big investment you are considering, long-term forecasting will be right for you. Long-term forecasts require less detail and are great for strategic planning and decision-making.

Source Data

For all cash forecasting in accounting, it’s important to have comprehensive and accurate data as a starting point. The historical data available will depend on how and where your business transacts. For most businesses, cash flow data is a combination of bank account statement, accounts receivable and accounts payable, and/or the software you use for accounting. The more accurate and up-to-date your data sources are, the more reliable your cash forecast will be.

Select A Method

There are many cash forecasting models you can choose from, and the right one depends on your business needs and the available data. The two primary forecasting methods are direct and indirect. Direct forecasting is more detailed and relies on actual transaction history from your business, which is great for predicting accurate cash positions in the short term. For longer-term cash forecasting, indirect forecasting is less detailed and relies more on trends and projections. Below are four popular cash forecasting approaches. Consider your business size, complexity, timeframe, data availability, and specific objectives before making a decision.

  • Straight Line Forecasting: A simple method that relies on past revenue to predict future revenue, and assumes that the rate of growth of the business will remain the same.
  • Time Series Forecasting: A more accurate forecasting method that identifies trends in the historical data and utilizes that to create a more detailed view of projected cash flow. While it requires more time and data, it can be especially helpful for seasonal businesses that have ebbs and flows in their revenue throughout the year.
  • Qualitative Forecasting: An even more robust forecasting method, qualitative forecasting combines historical data with research and insight from expert opinions.
  • Automated Cash Forecasting: This is an emerging approach that utilizes live interface data from your banks and enterprise resource planning (ERP) system, adds in some AI technology, and creates a custom cash forecast. The forecast will improve over time as machine learning algorithms continue to understand the trends of your business.

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Schedule a demo to learn how ICL and CashSimple™ can shorten your distance to cash today.

8 Cash Forecasting Best Practices

You can make cash flow forecasts more manageable with a few actionable best practices. Like a lot of things in life, a little extra preparation can go a long way in ensuring a complete and accurate cash flow projection.

Additionally, getting your team involved in the process can serve a dual purpose by providing training and development. Above all the best practices we will mention, be open to learning and adapting as you go. External forces such as swings in market conditions and internal forces such as business operations will inevitably change over time and thus affect your cash flow forecast.

  • Define the Purpose: Having a clear business plan and purpose will go a long way in creating an accurate cash forecast for your business.
  • Use Accurate and Relevant Data: The most effective cash flow techniques require accurate and relevant data as the foundation.
  • Choose the Right Software: An effective technique to improve cash management is to choose the right software for your business size, type, and purpose. One like Integrated Cash Logistics proprietary software manages and tracks cash data on your behalf, making it easier to get the details you need about the amount of cash coming and going from your business.
  • Integrate All Departments: Ensure all departments communicate with each other for a smooth cash forecast process.
  • Routinely Update and Review Forecasts: The more you routinely update and review forecasts, the more in tune you will be with the financial health of your business and the more confident you will be in business decision-making.
  • Use Scenario Analysis: Plan for realistic best and worst-case scenarios when you project cash flow, and have a game plan for each.
  • Implement Rolling Forecasts: Use present and past financial data from your company to inform future cash projections.
  • Train and Develop Teams: Encourage empowerment and collaboration among your team members by training them in the process of cash flow forecasting.

Challenges of Data Analytics For Forecasting

Even with robust cash flow forecasting software, you’ll likely run into challenges when integrating data analytics. Most commonly, you’ll encounter data quality and technology limitations. Consider a strategic approach by clearly defining your business objective, assessing the current state of your data and technology, and integrating it with business processes. Even after the integration is complete, it’s important to regularly monitor and assess performance.

  • Data Quality and Availability: Your cash forecasting will only be as good as the quality and availability of your financial statements and data.
  • Complex Business Operations: If your business operations are highly complex, you likely deal with numerous systems and data feeds that all need integration into your cash flow forecast.
  • Changing Market Conditions: A fluctuating market will have impacts on revenue, supply chain, interest rates, and more, all of which impact your cash flow forecast.
  • Technology Limitations: Outdated technology may limit your ability to accurately pull, process, and analyze the data you need.
  • Skill Gaps: If your finance team lacks full training, they may face skill gaps in data analytics, financial analysis, and statistics, which could hinder you, leading to inaccurate or delayed forecasting.
  • Difficult Software Integration: You may run into compatibility or integration challenges depending on the software system you are using.

Using Data Analytics For Cash Forecasting

Data analytics provides a powerful tool that can be applied to almost anything. When applied to cash flow forecasting it can greatly improve the accuracy and reliability of your forecasts, helping you make more informed decisions for your business.

Predictive modeling utilizes historical data to identify patterns and anticipate future cash flows. Machine learning takes it one step further by digging deeper into larger data sets and finding more complex trends. It continues to learn and improve over time as well. There is much to offer in the realm of data analytics, and when used to improve your cash flow forecasts the possibilities are endless.

Better Cash Forecasting with CashSimple™ from Integrated Cash Logistics

Cash flow forecasting is one very important piece of your company’s overall financial health. Better cash forecasting results in better decisions for your business which can lead to more revenue. CashSimpleSolutions from Integrated Cash Logistics uses complex technology and software to streamline your cash management. With one vendor, a simple pricing structure, and real-time reporting, implementing CashSimple into your business is a no-brainer.

Read more financial tips on our blog, from the real cost of cash in transit to how bank closures affect your business and more. Reach out today for a free demo to see how CashSimple can save your business time and money.