What Is Cash Flow Forecasting?

Cash flow forecasting is the process of ensuring a business doesn’t run out of cash. It includes projecting how much cash the business pulls in and how much it will spend to ensure it has enough to meet all its obligations and goals.

The smaller and newer the company, the more important it is to establish a cash forecasting method. Even the biggest corporations need real-time cash flow management tools.

How To Forecast Future Cash Flows in Accounts Receivables Collections

Accounting departments, especially the collections team, often use complex calculations to determine how much cash the company will have in hand by specific dates. These are the basic steps most collections specialist follow:

1. Determine the amount of cash at the start of a specific period.
2. Estimate how much cash revenue the business will earn.
3. Estimate how many cash expenses the business will pay.
4. Subtract the estimated expenses from the estimated cash flow.
5. Add the figure remaining to the cash in hand at the start of that specific period.

The Main Difference Between Positive and Negative Cash Flow

“Negative” and “positive” cash flow can be used to describe two areas of cash management. Positive cash flow refers to an increase in the company’s assets, but it can also describe a positive total figure for a specific period. Negative cash flow refers to a decrease in the company’s assets, but it can also describe a final figure for a period that reflects more cash going out than coming in.

Why Companies Need Cash Flow Projections

Borrowing money is expensive, especially for smaller companies with lower revenue and less equity. When companies properly monitor the flow of cash in and out of the business through management of collections, they reduce the need to pad revenue with working capital loans. It also ensures companies can meet their most important obligations, like salaries and paying existing creditors.

Cash Flow Statement Vs. Cash Flow Forecasting

People new to collections often use the terms “cash flow statement” and “cash flow forecast” interchangeably. A cash flow statement is a document that details the past movement of cash in and out of the business. In contrast, a cash flow projection attempts to estimate how much cash will move in and out of the business by a future date. Collections teams frequently use cash flow statements to create cash flow forecasts.

There are also other factors companies should consider, such as:

• Future company innovation plans and how these might affect sales or efficiency
• Global or local crises and their effects on the economy
• Normal, year-to-year seasonal changes
• Shifts in customer preferences and where the company currently falls on the spectrum

How To Improve A/R Cash Collection

Knowing how to improve cash collection is crucial to your business’s survival and growth. These are some easy ways collections specialist can accomplish this:

• Complete due diligence checks for each client or customer before extending credit.
• Offer multiple payment options.
• Send invoices on time and as soon as possible.
• Try to work closely with clients or customers struggling to pay.
• Most importantly – automate accounts receivable collections.

At Gaviti, we help our clients decrease write-offs and improve cash flow. A/R collections departments use our tools to streamline the cash forecasting process which saves time and money. Are you looking for ways to better monitor and improve your cash flow? Speak to a Specialist and we’ll show you just how easy it is.