October 7, 2020

Cash Flow Forecasting Helps Business Owners Avoid Cash Shortfalls

By Dawn Minotas, Managing Director, Outsourced Managed Services

Cash Flow Forecasting Helps Business Owners Avoid Cash Shortfalls Managed Accounting Services

Cash flow is often the single biggest concern for businesses, especially during difficult economic times such as those brought about by the COVID-19 pandemic. Forecasting cash can help you project potential cash flow shortfalls so you can plan and take action accordingly. By knowing what to expect, you can reduce or even eliminate the need to make hasty or uninformed decisions, which can damage your business over the long term.

There are several advantages to forecasting your company’s cash flow:

  • You can make informed business decisions based on the timing of your cash flows.
  • You can assess and adjust your future working capital needs before you need the funds. This enables you to obtain or increase a line of credit before your business actually needs the funds to support operations.
  • Your business will save money over time by avoiding late fees and bank charges from overdrafts.
  • You can preserve your company’s good credit standing by reducing or eliminating late payments and overdue bills.
  • You’ll be able to identify and address late-paying customers and take action to receive your cash payments in a timely manner.
  • You can determine what credit terms to offer to customers, based on their payment history.
  • You can identify when you may have excess cash on hand so you can put it to work. You may choose to pay down high interest rate debt or invest excess cash to earn interest through vehicles such as liquid money market or sweep accounts.

Take the First Steps

It’s easy to get started forecasting your company’s cash flow needs:

  • Begin by determining the time period that is best for your business, such as weekly or monthly. This may depend on how often you invoice customers, your payment terms, and how often you pay your company’s bills.
  • Start with the cash held in the bank and add in anticipated cash receipts from customer payments, line of credit draws, refunds, cash credits, and other inflows.
  • Subtract out vendor payments, rent, credit card payments, utilities, and other cash outflows.
  • Calculate whether your cash inflows meet your cash payment requirements. If you project a shortfall, consider how you can address it by pushing for faster customer payments, reducing expenses, or drawing on your line of credit.
  • Establish a rolling outlook for the next few months by extending your forecast at least two to three months into the future. Update it monthly.

The process you use for cash flow forecasting does not need to be complex. You can use a simple spreadsheet to track and plan cash flow, but there are many software programs and tools available such as QuickBooks, Dryrun, Float, and Pulse. These programs can connect with other business software such as the Hubdoc document storage program and apps such as Bill.com and Expensify.

Cash flow forecasting will help you take a proactive position when it comes to understanding your future cash needs, identifying spending gaps, and avoiding surprises. As a result, you will be able to make better decisions as you track your spending.

Marcum’s Accounting Services advisors will continue to update you on the latest tools to help your business grow. Consult your Marcum advisor for assistance.