Apart from accounting for every penny that comes in and out of your business, there are other advantages to a cash flow forecast:
Anticipate for any cash shortages
Forecasting allows you to spot cash gaps before they hit your business, allowing you a suitable time to cover this dip in your cash flow. By seeing this in advance, you are also able to take action before it hits. It may mean cutting operating costs or holding out on updating your equipment until you’re in the clear to save the cash shortage damaging your business. You could even change some customer payment terms or look for alternative finance options, but the most important thing regarding a cash shortage is that you’ll see it in advance with efficient forecasting.
Monitor consistent late payers
If your cash flow forecast keeps falling short each month, this will highlight late payers within your portfolio, making you aware of what clients are affecting your bottom line. Your forecast allows you to see how much should be coming in if everything was going to plan, so you will quickly spot any downfalls if figures aren’t met and it would be easy to identify the culprits that need a more effective credit control.
Track your spending
Cash flow forecasting can also help you track your outgoings from the business without doing it manually. For example, if you have a set figure that’s due to leave your business every month such as payment for utility bills, you can calculate your guaranteed total outgoings. If that number is higher than it should be, it will affect the total paying out figure and you will be able to identify what area of the business you are overpaying in fairly easily as its all monitored. If it wasn’t for forecasting, you may not have noticed this error if you had manually checked.
Project appraisal/business change planning
Having a cash flow forecast allows you to run through hypothetical business scenarios and assess their impact. For example, if you decided to expand into another country, you can forecast your cash flow to see if you'll be able to afford it using real data and figures. Using a detailed cash flow forecast will enable you to change independent variables and make informed business decisions based on what works best for your business.
There are many advantages of using a cash flow forecast, but it is mostly for protecting your business by trying to spot any warning signs well before they occur. Cash flow forecasting is a glimpse into the future of what your company could achieve with the back up of data to support your business decisions. Creating your cash flow forecast doesn't have to be a daunting task, follow the steps above of what it should include and build on it if your approach needs to be more detailed. You can trial it for a few months and adapt and change as you go.