The direct method is time-consuming but gives a detailed picture of cash movements and day-to-day liquidity. This means looking at all the money customers pay you and the money you pay for things such as salaries, rent, and supplies. The direct method includes counting every single dollar and cent you earn and spend. Two methods to forecast cash flow (and when to use them)īased on your business needs, you have two options to create a cash flow projection: the direct method and the indirect method. Since introducing the forecast, Tao Digital has increased cash reserves by 33% and acquired five new assets that generate a healthy return on investment. You'll need advanced tools to help analyze data and provide up-to-date information." Talking about what prompted them to shift from spreadsheet to software, Hayes explains: "If your business earns money from different sources, has fluctuating prices, and complex costs, you’ll quickly find that a basic spreadsheet isn't enough. Later, they transitioned to a software solution that directly extracted data from accounting records, further improving the efficiency and accuracy of the cash forecasting process. "By adopting a cash flow forecast, we could identify the months we could spend and the months we needed to reel our spending in," adds Hayes. Recognizing this gap, they started with a simple spreadsheet to project cash inflows and outflows for the next 12 months based on historical data. They needed a more precise tool to understand their financial position at any given point. To facilitate this, the marketing agency decided to budget for research and development (R&D) but couldn't identify-from their profit and loss statements alone-the months they would have surplus funds to take the plunge. "This was a costly project, so we needed to ensure we have the funds to employ the right team," shares Catherine Hayes, head of finance at Tao Digital. Cash forecasting helps you continually reassess resource allocations, ensuring you pay off your liabilities and expenses on time and stay financially healthy to secure funds from creditors when you need them.įour years ago, U.K.-based marketing agency Tao Digital set a strategic goal to expand through the acquisition and optimization of web assets. But without adequate funds, growth will be challenging. Prepare for growthĪs your small business grows, you'll need more of everything-staff, inventory, resources-and faster than ever. By predicting how much inventory you'll need based on what you usually sell, cash flow forecasting saves you from buying too much or too little. Cash flow forecasting helps maintain the perfect balance in inventory control. Inventory sitting idle is a missed opportunity, while insufficient inventory can lead to customer dissatisfaction. This visibility enables opportunities to trim expenses without compromising quality and keeping a rein on your cash outflows. Cash flow forecasting helps you watch every dollar you spend by showcasing variances between forecasted spend and actual spend. Prevent overspendingĮscalating expenses-from material procurement to payroll-can quickly erode your financial stability. ![]() ![]() "During this phase, your business loses more money in operations than it earns, so be almost paranoid about timely collections," she suggests. Hayes advises small businesses to be especially rigorous about collecting money in the early stages. This foresight can help you adapt your collection strategy by shortening payment terms, offering early payment discounts, etc. Cash flow forecasting allows you to visualize payment cycles and spot potential delays in receivables. When customers owe you money but take a long time to pay, it can be tough to sustain operations. Visibility into periods of low sales and their causes (say, seasonal dips or significant expenditure) allows your business to come up with strategies to boost sales, such as launching a new marketing campaign or offering sales promotions. By analyzing historical spend patterns, cash flow forecasting can identify periods where your projected expenses exceeded projected income. Without adequate sales, you won't be able to cover your operating expenses or invest in growth opportunities. Discussed below are a few business situations where this practice helps. Example of a cash flow forecast created in accounting software CashAnalytics Benefits of cash flow forecastingīy serving as a diagnostic tool, cash flow forecasting helps uncover the root cause of your cash troubles.
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