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Every morning at my children\u2019s bus stop, there\u2019s a foolproof way to tell that the bus is about to arrive: When you see a hoard of children running from the park to the bus stop, you know the faithful yellow hardtop is on its way.<\/p>\r\n\r\n\r\n\r\n
Is this child\u2019s play or strategy? I\u2019d say tactical because experience has shown these kids that they have just enough time to get from the park to the bus stop once they\u2019ve seen the bus heading their way. What does this have to do with cash flow forecasting, like a\u00a0free assessment<\/a> from Forwardly? Everything.<\/p>\r\n\r\n\r\n\r\n If you pay attention to how and when cash is flowing in and out of your business, you\u2019ll never miss the bus. Or, at the very least, you\u2019ll have a pretty solid idea when the bus is coming, if it\u2019s running late or if you\u2019ll need alternate transportation.<\/p>\r\n\r\n\r\n\r\n Another reason to watch for the bus known as your cash flow:\u00a0Nearly 60% of all failed businesses say\u00a0cash flow<\/a>\u00a0was the main reason for their demise.<\/em><\/strong><\/p>\r\n\r\n\r\n\r\n A cash flow forecast (cash flow projection) is a report created over time, using information from a business\u2019 cash flow statement (cash flow analysis). Think of it this way: When you have a checking account, you get a monthly statement. If you develop a system for comparing these statements over time, you get a history of your checking account activity. Using this history, you can then make forward-looking predictions.<\/p>\r\n\r\n\r\n\r\n If you only look at one statement, you\u2019re only getting the details for one specific period of time. It\u2019s like taking a survey of five people instead of 500. When your sample is smaller, your results are less reliable, and cause and effect is much harder to prove or discern.<\/p>\r\n\r\n\r\n\r\n This is where cash flow forecasting comes into play. Building upon regular cash flow analysis, cash flow forecasting helps you develop a better, more comprehensive picture of your cash flow over time.<\/p>\r\n\r\n\r\n\r\n \u201cWhen it comes to liquidity analysis, cash flow information is more reliable than balance sheet or income statement information. Balance sheet data are static \u2014 measuring a single point in time \u2014 while the income statement contains many arbitrary noncash allocations \u2014 for example, pension contributions and depreciation and amortization. In contrast, the cash flow statement records the changes in the other statements.\u201d<\/p>\r\n \u2014\u00a0Journal of Accountancy<\/a><\/em><\/p>\r\n<\/blockquote>\r\n\r\n\r\n\r\n In the words the pre-Socratic Greek philosopher Ephesus, \u201cThe only thing that is constant is change.\u201d<\/p>\r\n\r\n\r\n\r\n A cash flow statement looks at all the main areas where cash comes in or out of your business. When you pull all this information together and repeat the process over time through cash flow forecasting, you can see:<\/p>\r\n\r\n\r\n\r\n The more you often you complete a cash flow analysis, the more information you have to build your cash flow forecasts and the better perspective you\u2019ll get of how your business is really performing.<\/p>\r\n\r\n\r\n\r\n Imagine if you didn\u2019t pay attention to your bank account balance and your cash management system was saying a tiny prayer every time you used your debit card. Not the most effective or confidence building method, right?<\/p>\r\n\r\n\r\n\r\n The same rules apply to the financial health of your business. Having an awareness of how and when money flows in and out of your company through cash flow forecasting, lets you plan and prepare more effectively for:<\/p>\r\n\r\n\r\n\r\n For seasonal businesses, cash flow forecasting gives you a better idea of how to plan for busy and slow periods. For any business, comparing the numbers in your cash flow statements against your projections will determine just how accurate your predictions are. This can also further pinpoint strengths and weaknesses in a range of areas.<\/p>\r\n\r\n\r\n\r\n If sales are higher than projected, you can plan to order more product or enhance current features. You might even consider a price increase. On the other hand, if sales are down, you\u2019ll need to figure out what\u2019s happened and why. Before the issue eats away at your cash flow.<\/p>\r\n\r\n\r\n\r\n Is it time for a sale or special offer? If you\u2019re watching your financials closely, you\u2019ll have a much better idea of what the answer should be.<\/p>\r\n\r\n\r\n\r\n Two areas that get a lot of attention as part of a cash flow forecast and analysis are accounts receivable and accounts payable. This makes sense from a top-down level because accounts receivable is what a business is owed from third parties and accounts payable represents the amount of money a business has to pay to other third parties.<\/p>\r\n\r\n\r\n\r\n When you monitor your cash flow as a business, you need to be specific about when payments are due versus when you get paid. For instance, you may have several bills due at the start of each month. However, due to you your payment terms, the cash from your customers won\u2019t hit your account until the end of the month.<\/p>\r\n\r\n\r\n\r\n Two metrics that you\u2019ll want to determine and keep track of over time are:<\/p>\r\n\r\n\r\n\r\n Keep in mind that both of these numbers are averages. Some vendors will always take longer to pay and there will always be that one debt that you\u2019ll have to keep whittling down. The norms for your industry will also affect these figures.<\/p>\r\n\r\n\r\n\r\n It\u2019s all about knowing the patterns. It\u2019s like keeping your personal calendar up to date so that you don\u2019t forget you have a meeting next Tuesday at 3 pm.<\/p>\r\n\r\n\r\n\r\n Ok, this was a leading question. Of course, there are. Fair warning\u2026 there\u2019s math ahead.<\/p>\r\n\r\n\r\n\r\n Once you\u2019ve started systematically recording your cash flow metrics, you can begin to leverage this data. One way this is done is through ratios \u2014\u00a0using the relationship between variables to create a new indicator.<\/p>\r\n\r\n\r\n\r\n It\u2019s \u201cplaying\u201d with your numbers, but in a good way \u2014 not a burn-the-books-they\u2019re-at-the-door-with-a-warrant sort of way. When you request a cash flow assessment from Forwardly, the following ratios are featured at the top of your report:<\/p>\r\n\r\n\r\n\r\n Over time as you figure out which metrics to watch, you\u2019ll put together more and more pieces of the cash flow puzzle.<\/p>\r\n\r\n\r\n\r\n If your business is heavily reliant in inventory as a source of revenue, you will also want to determine an average of how long it takes you to sell or turn over your inventory. The official term for this is days inventory outstanding. In conjunction with this metric, you\u2019ll want to calculate the number of times you deplete or sell all of your inventory per year as well as your cash conversion cycle (average collection period + inventory outstanding \u2013 average days payable).<\/p>\r\n\r\n\r\n\r\n Cash flow forecasting doesn\u2019t have to be time-consuming. With Forwardly, you simply connect your accounting software, select the business you\u2019d like to analyze and go.*<\/sup>\u00a0Our unique algorithms do the rest. Best of all, your highly visual and easy-to-read report is free and you can run your forecast as often as you need \u2014 so that your cash flow statements can give you enough history to create long-term projections.<\/p>\r\n\r\n\r\n\r\n \u201cA cash flow forecast is considered one of the most critical early warning systems for companies that operate with debt, and should be done on a regular basis.\u201d \u2014\u00a0QuickBooks Resource Center<\/a><\/p>\r\n<\/blockquote>\r\n\r\n\r\n\r\n As you get into a regular routine of measuring your cash flow statements against your cash flow forecast you\u2019ll start to see the allowable percentage of variance for your business. Should a result skew high or low of this percentage, it\u2019s a sign to take a deeper look and take action.<\/p>\r\n\r\n\r\n\r\n In most cases, you\u2019re really only able to use your cash flow projections to look ahead about a year. This is because there are some many things that you can\u2019t control, like interest rates, minimum wage increases, fuel costs and other variables.<\/p>\r\n\r\n\r\n\r\n The short answer is yes. Profitability is just the money coming in from the sale of goods and services. But, it\u2019s only one part of the equation. You can be making money, but if you\u2019re not paying attention to where you\u2019re spending your money, a surplus can evaporate quickly. (More quickly than an unsupervised bowl of candy at a children\u2019s party.)<\/p>\r\n\r\n\r\n\r\n The customer may always be right. But, cash is always king. Surveys conducted by the Business Development Bank of Canada (BDC) show that among small to medium-sized businesses only 12.5 \u2013 57% routinely measured or\u00a0projected<\/a>\u00a0their cash flows.<\/p>\r\n\r\n\r\n\r\n If you\u2019ve got enough drive and determination to own your own business, you\u2019ve got the fortitude to take a good hard look at your numbers with cash flow forecasting. Ready to get started?\u00a0<\/p>\r\nWhat\u2019s a cash flow forecast?<\/strong><\/h2>\r\n\r\n\r\n\r\n
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What can a cash flow forecast tell you about your business?<\/strong><\/h2>\r\n\r\n\r\n\r\n
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How can cash flow forecasting help you make smarter business decisions?<\/strong><\/h2>\r\n\r\n\r\n\r\n
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What are two areas that get the most scrutiny in a cash flow forecast?<\/strong><\/h2>\r\n\r\n\r\n\r\n
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Are there other indicators to look at as part of a cash flow forecast?<\/strong><\/h2>\r\n\r\n\r\n\r\n
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When inventory management is integral to your cash flow\u2026<\/strong><\/h2>\r\n\r\n\r\n\r\n
Is there an easy way to automate my cash flow forecasting?<\/strong><\/h2>\r\n\r\n\r\n\r\n
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Is there any margin for error for cash flow forecasting?<\/strong><\/h2>\r\n\r\n\r\n\r\n
If my business is profitable, do I need a cash flow forecast?<\/strong><\/h2>\r\n\r\n\r\n\r\n