Knowing the state of your cash flow is imperative for long-term sustainability and growth. But are you making avoidable mistakes when it comes to forecasting cash flow?
There's nary a leader who doesn't wish for a crystal ball when it comes to their business's future. Let's take some steps to make sure you're getting a glimpse of your cash-flow future as soon as possible.
If hindsight is 20/20, these tips can help you see the future with 20/15 vision.
1. Do you have a system for forecasting cash flow?
Every business should have a 12-month rolling forecast of estimated cash flow (based on historical company financial data) at their fingertips.
If this isn't a report you generate on the regular, you're missing out on a planning tool that can assist with budgeting spending, labor and resource allocation.
Meet with your financial team—internal or external—and implement a system to receive this report on a monthly basis.
If the function isn't already built into your accounting/bookkeeping software, there are a myriad of cloud-based systems that can help you see the future without breaking the bank.
2. Do you distinguish between cash-on-hand and profit?
When you're growing a business and you see money in the bank, it's easy to think it's readily available to spend.
But in order to effectively forecast cash flow, you need a financial professional who can help you distinguish between cash-on-hand and profit.
Without an effective means for forecasting cash flow, you could find yourself spending in quarters you need to remain lean and jeopardizing your nimbleness to ramp-up operations when sales flow in at a higher-than-usual rate.
Work with your financial team to ensure that your forecasting includes recommendations for year-round financial management strategies so you're not spending when saving is the way to go.
3. Do you have a DIY approach to business finance?
If you're at the helm of a thriving business, it's only natural to take pride in what you've brought to fruition. Your financial team might have been with you for the long-haul as well—from way back when you were a fledgling brand.
But have your finances grown beyond DIY?
If you ask any business leader who's failed on account of accounting errors, odds are they'll tell you they wish they had hired a professional for some perspective. Even if you're not ready to put a tax and advisory firm on retainer, there are plenty of ways to engage with financial professionals who can add perspective to your financial situation.
Sometimes it's hard to see the future when you're in the thick of the day-to-day operations. An outside professional eye—whether monthly, quarterly or annually—can help you better manage and forecast your cash flow, and find your blind spots before you're blindsided.
4. Are you running your business without a budget?
Be honest. Are you? Cool. Confession made.
It's tedious work establishing an annual budget and no lie, there are many businesses that find ways to thrive without one. Temporarily, at least.
To effectively forecast cash flow, you need to know where your spending and revenue projections stand for every quarter of the year. It's great to know that Q3 is typically your biggest influx of cash each year, but you have to balance that information out with year-long expenses, growth initiatives and unexpected obligations.
Your cash flow provides the fuel your budget runs on. Don't skip building the engine—no matter how successful you've been without one to-date.
5. Are you forgetting about loans and lines of credit?
If you're not forecasting cash flow with meticulous precision, you could be leaving money on the table when applying for business loans or lines of credit.
Your forecast will show a financial institution that you have historical data backing up your assertion that money is coming in and has come in on a predictable schedule. Faulty (or nonexistent) forecasting could leave you short of the short-term funds you need to tide your business over during lean times or those of exceptional need.
Now, you're armed with five questions to help you with forecasting cash flow and keeping it on the straight and narrow-year-round. Consider developing a forecasting plan. Look at all areas of your budget and assess how they'll be affected, and leverage professionals to help make the most of your financial data regardless of the time of year.
20/15 financial vision is waiting. What are you waiting for?
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