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Forecasting Cash Flows: Advantages, Steps & Best Practices

Estimating future cash flows should be a priority for every company. At its most basic, cash flow forecasting is a process by which a company predicts how much money flows in and out of the business. This is usually handled by the accounts receivable department. A cash flow projection examines each client’s payment histories and past invoices to determine how much cash will be available.

These calculations are traditionally done using manual spreadsheet tools, but as automated tools become more widely available, businesses would greatly benefit by streamlining significantly with specialized accounts receivable software tools.

The process sounds simple, but many companies struggle to apply a proper cash flow forecasting process in the context of their larger business goals. 

Here are the benefits of a strong accounts receivable cash flow forecast and the best methods to project future cash flows for your business.

The Advantages of Estimating Future Cash Flows

While some benefits of cash flow forecasting are self-evident (e.g., knowing how much money you have on hand), let’s frame the advantages in a larger business context.

Primarily, a cash flow projection helps you get a handle on your finances and know what to expect in terms of cash intake. This allows you to plan for the future and estimate the effects of specific business changes on your process. For example, companies with strong cash flows may have more flexibility for hiring more staff, rolling out new products, or committing to more environmentally sustainable processes.

On the flip side, an accounts receivable cash flow forecast can also tell you when and where adjustments need to be made to your process. Is cash flow too light? You may need to consider cutting expenses in some areas or getting more assertive with late customer payments.

This knowledge is helpful for both you and those who work with your company. Strong and consistent cash flow statements can prove to potential lenders your ability to make payments on time. It’s a valuable part of your business process that can’t be ignored.

What Is the Cash Flow Forecast Formula?

There isn’t one specific formula for estimating future cash flows. Instead, business owners can follow a series of steps that give them a good overview of their intake:

  1. Calculate your company’s available cash at the beginning of the calendar year.
  2. Pull financial reports from previous years, and using those trends, make a general prediction of how much cash you can expect to see in a comparable timeframe.
  3. Based on historical trends, estimate your potential expenses across supplies, investments, inventory, hiring, etc.
  4. Subtract those expenses from your expected intake. This will give you a cash flow projection estimate.
  5. Add your cash flow projection estimate to your opening balance. (This also provides your closing balance, which will carry over and act as your starting balance for the next period.)

How to Improve Your Company’s Cash Flow

What about actual cash flow improvement? As is the case with many accounts receivable collection functions, everything comes back to the data.

You’ll need to review past trends and patterns to make predictions for the future. This includes identifying your company’s strengths as well as its problem areas, such as poor collection practices; a common issue for many businesses.

It helps to categorize clients according to their payment behaviors, similar to creating an accounts receivable aging report. Your goal here is to get a better feel for what your clients are doing and to adjust your own internal processes to match the timing of cash flowing in – regardless of whether it’s on time or late.

It’s certainly possible to manage this data manually with spreadsheet tools, but this is one area where specialized accounts receivable collections automation tools can pay big dividends. Not only can these solutions automate the data collection process across your numerous sources, but the software enables new functions – such as predictive analytics – that offer more in-depth insight into your forecasting processes.

Leveraging these tools supports a faster assessment process, more accurate data, and better cash flow management across the board. If you’re ready to explore a better system for accounts receivables, contact our team at Gaviti! You can book a demo of our platform and see for yourself just how powerful these forecasting tools can be.

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