Every business should monitor and understand their cash flow, forecasting allows a business to differentiate between two of the most important financial metrics, cash flow and profit.
Having the knowledge and understanding of how your cash flow will be impacted by different circumstances gives businesses greater insight into their future, be it survival, stabilisation or growth. COVID-19 has provided yet another scenario for businesses to consider, which needs to be tailored to each individual organisations situation to model the outcome.
What is cash flow planning?
Cash flow is the measurement of how much money is moving in and out of your business during a period of time. When it comes to running a business, cash flows are essential to solvency while cash flow forecasting is a key way to mitigate any upcoming financial stress.
A cash flow forecast will involve modelling multiple scenarios to understand how various situations could affect the business, for example investment in capital expenditure or customers delaying payment. The business should assess the impact of these events to establish how the business would cope under different scenarios.
Businesses who are not currently undertaking any cash flow forecasting should consider doing so. Being able to adapt your operations to the risks that can occur on a daily basis and protect your cash flow should be a priority.
There are two types of forecasting:
- Direct – Based on cash receipts and outgoings
- Indirect – Starts at the profit position and adjusts back to a cash basis, useful for reconciling profit to cash.
For more information on these methods please click
here.
What are the benefits?
An in-depth cash flow projection can help a business prepare and plan for both positive and negative possibilities. Forecasting and managing your cash flow will allow the business to:
- Monitor how late payments effects the balance sheet
- Plan for both expected and unexpected cash gaps/shortages as well as “slow months”
- Review how effective current budgeting is and improve accuracy of future budgeting
- If there is unexpected surplus cash, how can this be capitalised upon, e.g. re-investment, loan re-payment or paying suppliers advance
- Provide detailed information to board members, banks, stakeholders, investors, private equity firms
- Maintain sufficient cash in the bank to pay bills, invest or expand in line with strategic plan
- Plan for managed borrowing and allow for bulk purchasing (discounted)
Above are just a few of the benefits, if you want to see some more in-detail reasons please check
6 ways cash flow forecasting can benefit your business.
Modernising your forecasting systems and tools
To fully understand your business’ cash flow, you will need the most up to date financial information about your business.
Cloud accounting software gives you the ability to access your business’ whole financial picture all in one place, at any time.
Many businesses had not invested in a cloud accounting software provider prior to, or during the COVID-19 pandemic, this may have made it more complex for them to access their financial data in traditional ways and it is therefore no surprise that cloud accounting software has seen a rise in use by businesses.
How we can help
Our dedicated teams at Moore (South) will be able to assist you with any cash flow planning or cloud accounting needs.
We can guide you through the planning process, while also helping you find the right cloud accounting package and relevant apps for your business needs.
If you would like to discuss a switch to cloud systems and how they can have a positive impact on your business’ cash flow, or information on our other services, please contact your local
Moore (South) office.