Cash flow forecasting. Those three words strike fear into the hearts of many business owners. Why? As we discussed in a previous post, many small business owners simply do not manage their cash inflows and outflows well over time. Couple this challenge with the fact that many businesses inefficiently forecast when faced with expenditures, loans, or a fluctuating market, and you have a recipe for trouble.
Fortunately, cash flow forecasting is formulaic and does not have to be painful. In this post, we’ll examine some best practices to help ensure your cash flow remains positive.
Determine Peak Needs
For cash flow forecasting, your financial adviser should be on speed dial. A financial adviser can identify the hills and valleys of production, predict potential surpluses or shortages, and therefore plan accordingly to keep your business running smoothly.
You should also seek out a trusted advisor to help you understand your net working capital as a percent of sales. With this knowledge, you can quickly estimate capital requirements related to new contracts, expanding customers, and changing business levels.
Leave No Stone Unturned
Account for everything. Efficient, accurate cash flow forecasting requires access to, and consideration of, all overhead – both recurring and non-recurring. Be sure to account for labor, raw material and energy, as well as non-recurring expenses such as legal fees and tax preparation costs. Additionally be sure to account for non income statement expenses such as loan payments, capital equipment replacements, prepaid expenses and deposits.
It is imperative to anticipate every future cash outflow and incoming payment, as well as the timing of payables and account receivables.
Identify Barriers And Plan Your Solutions
A significant barrier to cash flow management is ineffective invoicing, which in turn, can delay payments. Be it incorrect information, delaying invoices, or permitting late payments, poor invoicing practices lead to inconsistent delayed cash flow and ultimately harm a company’s operation. Aside from offering payment reminders or incentives, timely invoicing is an easy technique to practice to help rebuild cash flow. Many companies also provide a variety of payment services to streamline the billing process. From apps to online/e-commerce solutions and pay-by-phone systems, digital payment processes can help improve cash flow.
Inadequate resource management is a challenge shared by companies today. If not managed properly, expenses and overhead can have an adverse effect on cash flow. Examples of poor resource management include unnecessarily repetitive processes, redundant systems and machinery, rework, unwise investments, and excess office space.
Business disputes can also be detrimental, and leave businesses hamstrung and scrambling if proactive measures have not been taken to manage risk. By following best practices, ensuring your policies, business forms, contracts, and governing documents are appropriate for your business environment, and consulting regularly with legal counsel, you may be able to avoid costly business disputes and maintain a solid defense.
The Bottom Line
Cash flow forecasting should be a primary component of any business plan. Because it requires a thorough, proactive, and thoughtful approach, using the tips outlined above will lead to improved cash flow management.
Contact Lauber Business Partners today if you’re interested in learning more about effective cash flow forecasting or need help implementing such strategies into your organization. We have the expertise to transform your operation and help you establish sustainable cash management systems.