Your business might not feel the changes in revenue immediately; however, the role of cash flow movements is felt almost instantaneously in your business. This is because revenue rises and falls every month. It might not show any difference for weeks or months. However, this is not the case with cash flow movements.
Cash flows in and out of your business every day and is controlled by a plethora of variables within the fabric of your business. Cash flow movements are highly volatile and keep fluctuating each day. This is why it is extremely important for businesses to take stock of their cash flow and financial situation and engage in efficient methods of cash flow forecast. Reviewing how the cash flows through your business and making calculated guesses about your business’s future cash needs shall help you optimize your cash better and plan ahead in time. Having said that, we shall now look into a few things that you must know about cash flow forecast and then move ahead with discussing the importance of cash flow forecast for your business.
How Far Ahead Should a Cash Flow Forecast Look?
The first thing that we must talk about when it comes to understanding cash flow forecasts is how far ahead should it look. Ideally, a cash flow forecast must be able to provide you with insights for at least one cash cycle. One cash cycle lasts for about 13 weeks for any typical business. Therefore, your cash flow forecast must be able to predict all your cash movements and help you make financial strategies for at least 13 weeks. The working definition of a cash cycle is the time period between which a business or service makes payments in cash to its suppliers or vendors and receives payments from its customers.
Let us take the example of a manufacturing business, for instance. The business would first purchase its raw materials in the first week. In the second or third week, it might receive the materials. By week five, it would have converted the raw materials to finished products, store the same in inventory till the eighth week, send invoices and ship the product in the same week and receive payments for the products in week 13.
Who Should Take Care of a Business’s Cash Flow Forecasting?
Cash flow forecasting must be ideally the responsibility of the finance team of any organization. However, the roles and responsibilities really depend on the size of the organization. For big businesses, the CFO or the financial controller might have to take care of the process of cash forecasting. However, for small businesses or independent businesses, the owner or the entrepreneur might have to take care of anything and everything.
It is always advisable for the finance team to manage and deal with cash flow forecasts since they have access to financial information from all parts of the business. This shall make it easy for them to understand the cash movements, analyze the financial situation of the business and do the needful.
Importance of Cash Flow Forecasting:
The main reason why cash flow forecasting is so important for businesses is that it helps businesses plan ahead in time and keep up with any sudden demands of cash. For businesses to manage their cash flow and understand what their cash requirements might be in the future, optimal cash management strategies must be roped in.
Cash flow forecasting helps in cash optimization and makes it easy for businesses to stay afloat even in times of emergencies. Plus, it also helps them deal with financial pressures and liabilities more efficiently since businesses already know what they can expect in the future. There is little room for surprises over there.
Cash flow forecasting also helps businesses keep up with the trends in the market and make wise financial decisions that shall stick in the long run. It allows businesses, no matter what their scale is, to make informed decisions about how they should invest, how much they should spend and where they must cut back on.
Now that we are in the middle of a pandemic, cash forecasting is more important than ever. Businesses cannot afford to waste their money or risk making inane financial decisions. Therefore, for businesses to thrive and scale heights of success, cash flow forecasting shall always be a criterion that they need to pay attention to.
The discussion that ensued proves that cash flow forecasting shall always be considered prime importance if businesses succeed. It hardly matters if we are in the middle of a pandemic or not. Optimal cash flow forecasting strategies must be deployed if you are to optimize your cash flow and make profits for the long term.