Cash Flow Forecasting 101: How To Keep Your Business Afloat Every Month

One of the commonly observed mistakes with bookkeeping services for small businesses in the USA to simply producing and evaluating cash flow statements once a year. When cash flow is only evaluated once a year, businesses fail to anticipate any future risks and highly carry the risk of going bankrupt.

Dun and Bradstreet’s research shows that businesses that only review their cash flow once a year have a 36% survival rate after 5 years, while those that do monthly planning survive 80% of the time.

Hence cash flow forecasting is very essential to avoid any cash flow problems and to keep your business afloat. In this article, we’ll walk you through the steps of forecasting your cash flow and suggest some tips on how to use your forecast to improve your business’ performance. Are you ready to take control of your finances? Let’s get started!

Understanding the Basics of Cash Flow

In order to project and forecast your cash flow, you need to understand the basics. In short, it is the amount of cash (and equivalents) that moves in and out of your business over a specific period of time. This can be monthly, quarterly, or yearly.

There are three key factors that influence your company’s financial flow: revenue, expenses, and capital investments. Your revenue is the money coming in, your expenses are the money going out, and your capital investments are the money you put into your business (such as buying equipment or investing in new products or services).

If you want to project and forecast your cash, you need to track all of these factors closely. You also need to be realistic in your estimates, so you can plan for future growth and changes in your business.

Identifying Cash Flow Problems

If you’re not careful, your business can easily fall into a financial crunch. What this means is that you won’t have enough cash coming in to cover your expenses. This can be a major problem, especially if it lasts for an extended period of time.

There are a few key signs that can indicate that you’re having cash flow problems. Here are some of the most common ones:

1. Your business has trouble paying its bills on time
2. Your inventory is starting to dwindle
3. You’re having trouble making payroll
4. You’re not able to invest in new equipment or marketing initiatives

If you’re seeing any of these signs, it’s important to take action and find a way to improve your finances. Ignoring the problem will only make it worse.

How to Project and Forecast Your Cash Flow for Your Business

Projecting and forecasting your financials is an important task for any business, as it can help you identify potential cash flow problems and take steps to mitigate them. Here are some steps you can take for forecasting:

1. Gather historical financial data: Start by gathering historical financial data for your business, including income statements, balance sheets, and cash flow statements. This information will serve as the foundation for your projections and forecasts.
2. Identify key drivers: Next, identify the key drivers of cash flow for your business, such as revenue, expenses, and capital expenditures. Understanding how these factors affect financial flow will help you make more accurate projections and forecasts.
3. Develop a projection model: Use your historical financial data and understanding of the key drivers to develop a projection model for your business. This model should take into account factors such as revenue growth, changes in expenses, and any planned capital expenditures.
4. Make assumptions and use industry benchmarks: When making projections, it’s important to make assumptions about future events and conditions, and to use industry benchmarks to validate your assumptions. For example, you might assume a certain rate of revenue growth and compare that assumption to industry averages to see if it is reasonable.
5. Review and update your projections regularly: Review and update your projections regularly, especially if there are significant changes in your business or industry. This will help you stay on top of potential cash issues and make adjustments as needed.
6. Develop a cash flow budget: Finally, use your projections and forecasts to develop a budget. This budget should take into account projected cash inflows and outflows and should be used as a tool for monitoring actual cash and making adjustments as needed.

It is crucial to recognize that financial forecasting is difficult and hence it’s recommended to consult a professional or outsource in order to overcome 5 cash flow forecasting challenges.

Benefits of Outsourcing Bookkeeping Services for Small Businesses

If you’re wondering why you should outsource your financial management, you’re probably unaware of the 11 benefits of outsourcing bookkeeping services for small businesses in the USA. Let’s understand how it can enhance your finances:

1. An outsourced team typically has more expertise and experience in forecasting than an in-house team, as it is their specialized area of focus. This can lead to more accurate forecasting, as they will have a better understanding of its various drivers and will be able to anticipate potential issues before they arise.
2. It can also lead to improved data collection and analysis. An outsourced team will have access to a wide range of tools and technologies that can be used to collect and analyze financial data, which can be more efficient and effective than traditional methods. This can lead to more accurate and up-to-date forecasts, as the team will have access to real-time data that can be used to make adjustments as needed.
3. It can help improve forecasting by providing a more objective view, as external providers are not emotionally invested in the company, they may be able to identify potential risks or inefficiencies that an internal team may be blind to.
4. It also frees up internal resources, enabling you to focus on core competencies, while an external team takes care of your finances, which can help the company to operate more efficiently and effectively.

Conclusion

When you are running a small business, the flow of cash is always a concern. You need to be able to project and forecast your cash flow so you can make sure you have the money you need to run your business. You can benefit from outsourcing bookkeeping services for small businesses and can focus on running your business hassle-free.

IBN Tech is a leading provider of accounting and bookkeeping services for small businesses in the USA. With our outsourced cash flow management services you can gain control over your business finances and improve your bottom line. Get in touch with us today to learn more about our services.