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Cash Flow Forecasting, Methods & Its SignificanceSimply put, cash flow forecasting refers to estimating your business’s future financial position—helping you manage your liquidity better and ensure that you have sufficient cash to pay expenses, continue operating and invest in growth opportunities. There are two general methods of cash flow forecasting: direct and indirect. Thus, the main difference between these two is that the direct method utilises actual flow data. On the other hand, the indirect method depends on income statements and projected balance sheets. To elucidate further, here’s a summary of what cash flow forecasting can do for your enterprise:
- Easily understand your current and future cash position and determine the potential cash shortfalls well in advance. With that, you’ll be able to avoid financial trouble.
- Examining trends and potential situations allows you to make data-driven and well-informed decisions to manage risks and plan for your business’s future.
- Monitor late payments.
- Meet your tax obligations.
- Decrease your reliance on credit card debt and business loans since you’ll know and be able to confirm if you’ll have enough funds to cover your business operation costs (e.g. pay suppliers, meet payrolls etc.)
- If you really need to apply for financial backups relevant to your business expansion and growth, having an accurate cash flow projection can help you build your case for investments since you can prove you are eligible to pay back. Thus, you can also use cash flow forecasts to improve your cash flow position before applying for business funding, increasing your chances of approval.
Key To Accurate Cash Flow Forecasting To Quickly Scale Up Your Business: Significant Guidelines
1) Determine Your Inflows and OutflowsAs business owners, getting up close and personal with your financial health is a must if you want your cash flow forecasts to be accurate. Of course, this involves knowing your business’s cash ins and outs. Check out some of the usual items that count towards cash inflows.
- Revenue from sales (your company’s primary source of income)
- Sale of assets
- One-time sales
- New funding
- Day-to-day business expenses (refer to your obvious expenditures, such as utilities, office supplies, rent, payroll, repayments and loan payments)
- Purchase of assets
- Other fees (e.g. payment processors)