Cash flow management is one of the most important functions of your finance team, and, by extension, your senior leadership team. From small businesses to international enterprises, understanding the rhythm of cash-in to expenses and debt is crucial to business operations. Poor cash management goes beyond disappointing your board of directors. It can ultimately lead to not having the resources to keep the doors open.
Knowing how important cash flow management is, it should come as no surprise that forecasting your cash flow is also important. This can get more and more complicated, however, as your business increases in size. Regardless of revenue or employee count, though, every business needs to make accurate cash flow forecasting a priority. If you’re still relying on Excel for your cash flow projections, you may be setting yourself up for problems.
What is Cash Flow Forecasting and Why is it Important?
Here’s the harsh reality of business finances – your revenue can look great, and yet you can still struggle to keep a business afloat. Why? Just because a customer has booked a sale with you doesn’t mean you have that money in hand yet. And the promise of a sale doesn’t pay your company’s business expenses and obligations, like rent, debt repayment, and employee wages.
Certainly, revenue is important, but cash flow management is a key piece to the daily operations of a business. Managing your cash flow goes beyond simply having enough in the bank today to keep the doors open.
Companies have a natural ebb and flow of expenses and income. Customers place orders, materials are needed from vendors to make products to fulfill those orders. You may need to make more product than you need today to meet tomorrow’s customer demands, meaning suppliers may need to be paid before you’ve sold your products. And at the same time, there is a steady stream of expenses that need to be paid.
That’s why cash flow forecasting is so important. It’s a necessary piece to ensure that you have the ready assets to meet your business obligations even when clients are slow to pay, or you’re gearing up for a busy sales season.
The Challenges with Cash Flow Forecasting
Of course, forecasting your cash flow isn’t always an easy thing. For small businesses that are closely balancing realized revenues with expenses, even a minor slip can be detrimental. Overestimating sales when cash flow is low can result in too much inventory or too many staff members and not enough cash to pay the bills.
Larger companies have a slightly different problem. While there may be more resources to draw from, there are also more business units and moving parts that can be drawing from a company’s reserves. The CFO and the finance team need a complete and accurate picture of the timing of incoming revenue and expected expenses to meet the business’s fiscal responsibilities. At the same time, it’s the role of the office of finance today to ensure that cash is available at the right time, according to the business plan, to make the appropriate strides toward growth or other goals.
This means that cash flow data coming into the forecast must be timely and complete. It also means that companies that are using spreadsheets or software that lacks the ability to automate data integration for cash flow visibility can negatively impact the forecast accuracy and inhibit timely, informed decision making.
Cash Flow Forecasting Software
Financial and accounting software with features especially meant to simplify and accelerate the forecasting process can ensure accuracy and keep a company’s bottom line healthy.
For small businesses, accurate cash flow forecasts are crucial to keeping their heads above water. More importantly, a clear view of expected cash flow means that a small business’s finance team can identify trends that are impacting the business’s cash flow, like customers that are slow to pay and deal with those issues quickly.
Larger businesses also benefit from the visibility cash flow forecasting software can offer. By using accounting software that automates the flow of financial data directly into the cash flow statement, finance teams can quickly see deviations from projections. Financial planning software, like Planning Maestro, that includes reporting and analysis can help the CFO and the office of finance pinpoint cash flow challenges early on and promote informed decision making by comparing cash flow forecasts to budget projections and identifying misalignment. The right software can also increase stakeholder visibility into the company’s cash flow position, promoting buy-in from business leaders and improving communications around company financials.
Cash flow forecasting is an important process to ensure that a company has the resources it needs, when it needs them, to drive the business forward. Without it, a company can face shortfalls and endanger the business. Cash flow forecasting software can simplify the process, improving accuracy, automating data incorporation, and ensuring the business can meet, or exceed, its goals.
Centage Corporation’s Planning Maestro is a cloud-native planning & analytics platform that delivers year-round financial intelligence. With Planning Maestro, Centage offers the sophisticated features needed by small and mid-market organizations to integrate budgeting, forecasting, and deep data analysis within one easy-to-use, scalable SaaS solution. For more information on how to modernize your office of finance with intelligent planning, view our product demonstration video, or call 800-366-5111.