Cash Forecasting

Mastering cash forecasting accuracy is one of the top challenges shared by businesses of all sizes. While managers refer to it by various names, such as “accounts receivable forecasting” or “corporate cash flow forecasting,” the general process and goals are the same. A big part of cash flow management comes down to skill, but businesses can also leverage the power of technology.

What Is Cash Flow Forecasting?

The corporate cash forecasting process involves reviewing financial documents and completing complex calculations to predict how much cash the business will have at a specific date. Depending on the business model and payment process, it could also serve to predict when customers will pay their invoices and how much of those invoices they will pay. However, it considers the aggregate number more than individual cases.

What Are the Main Components of Cash Flow Forecasting?

Business managers and accountants have developed several methods to predict cash flow. Most of these methods include these three components:

  1. Cash expenses for cost-of-goods sold: This is often expressed as a percentage of sales, which may take a few months of operations to accurately estimate.
  2. Cash paid for labor: Labor is one of the highest expenses to account for; variability may depend on the business model.
  3. Cash receipts from customers: When estimating how much money the business will receive from sales, it’s important to approximate potential late payments.

Why Do Companies Need To Predict Cash Flow?

The most obvious reason companies need to predict cash flow is to ensure they do not default on their own payments (even when customers do). There are some factors to consider:

  • Big projects: Companies need cash flow forecasts to be as accurate as possible when undertaking big projects, such as the modernization of elevator systems.
  • Economic declines: During recessions, companies need to manage cash well to ensure they have enough excess cash to spread out across slower periods.
  • Investors: Cash flow forecasting plays a big role in whether investors provide capital to fund business goals after reviewing the business plan.

Cash Flow Forecast Example

Most businesses try to forecast cash flow throughout the month. Below is a standard example of what this might look like on the books during peak season at a small business:

Opening Cash Balance $5,000

Cash Inflow

  • Sales $150,000
  • Grants $5,000

Total Cash Inflow $155,0000

Cash Outflow

  • Payroll $50,000
  • Marketing $5,000
  • Materials $5,000

Total Cash Outflow $60,000

Net Cash Flow $95,000

Closing Cash Balance $100,000

Can Cash Forecasting Automation Help?

Companies generally try to forecast cash balances on a monthly and quarterly basis. On some occasions, they may also need to double-check the cash forecast for specific periods, such as when big payments are due.

Automating accounts receivable collections forecasting can simplify the process and improve cash forecasting accuracy. Technology provides real-time cash forecasting so managers have current information when making corporate decisions.

Gaviti provides these services while also helping A/R teams to automate the communications process to encourage payments. Do these sound like perks that would benefit your business? Book a free demo of our software.

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