Cash flow forecasting is the process of estimating the cash inflows and outflows of a company in a given period of time. An accurate and rapid cash flow forecast equips a company with a preliminary knowledge of the financial position in the future. On the one hand, it avoids a serious cash shortage. On the other hand, it enables decision-makers to earn returns on cash surpluses they may have in the most proper way possible.
In September 2008, hundreds of well-suited employees walked out of one skyscraper on Wall Street, with boxes in their hands. The media cameras turned on them, ringing the death knell of Lehman Brothers, the fourth-largest investment bank in the US before the bankruptcy.
Lehman could technically reverse its miserable destiny with $639 million in assets and $613 million in debt, but because most assets are difficult to sell into liquid assets such as cash, it was running out of time quickly after only $1 billion cash left.
The financial giant was eventually killed by cash flow problems.
But cash flow problems are more fatal to small businesses, especially startups, than to those titans of Wall Street, as they are more vulnerable to irregular economic situations and unwise business strategies due to their age and size. For example, Fast, a startup providing online checkout products failed fast after poor cash flow management. And according to recent research, 61% of the small businesses globally were struggling with cash flow, and nearly a third (32%) cannot pay vendors, pay back pending loans, or pay employees due to cash flow problems.
So what is the key for small businesses to avoid poor cash flow management and plan ahead for the future? Cash flow forecasting.
Before talking about cash flow forecasts, you need to know about cash flow first. The term cash flow refers to the net changes of cash and cash equivalents(CCE) being transferred in and out of a company. Cash received represents inflows and cash given out represents outflows.
Cash is often said to be the lifeblood of business, because like blood it flows through the body and keeps it alive. Simiarlily, in accounting terms, cash is the most liquid asset on the balance sheet, and the movement of the lifeblood is usually shown in a financial statement called a cash flow statement. Investors, board members and even the public (for those firms on the list) can see where the company’s cash position is, annually or quarterly. Do they have enough cash to pay off their debts? Do they have enough money to fund operating expenses? And do they have extra funds for investment and further development? All can be answered in the cash flow statement.
However, traditional cash flow statements cannot give you foresight. For founders, data predicting the future is much more useful than those historic numbers on financial statements. They need quick answers to questions like:
These are the types of questions cash flow forecast models can answer.
A cash flow forecast is the process of estimating the amount of cash in and out of a company in a given period of time. It offers founders a forward-looking view of how well the company generates cash from operating activities, investing activities and financing activities and how cash can be used to fund those activities:
Cash flow from operating activities, or operating cash flow, records money directly involved in the sales and production of goods or services, for example:
Cash flow from investing activities represents money gained or spent in investment-related activities such as:
Cash flow from financing activities, or financing cash flow, describes the net flows of cash used to fund the company and its capital.
Among the three, cash flow from operating activities is closely related to the core business and provides the best opportunity to improve cash management of a company. Founders should also pay more attention to accounts receivable, accounts payable and inventories in order to improve cash management.
Enough cash reserves can ensure liquidity and solvency, which are vital to a company’s survival in the short run. Meanwhile, a company should make use of spare money on reinvesting in the business, research and development and marketing, etc. if the company is on the rise. Founders can plan their business strategy ahead of time and make smart decisions with the help of a good cash flow forecast model.
Cash flow forecasts can:
However, it is often harder for small businesses to run cash flow forecasting models and manage cash flow on their own, as they lack the funds for a finance team (unlike larger companies). Some obstacles small business may face when trying to forecast cash flow include::
A simple solution to curb these obstacles is a good Cash flow forecasting software. These kinds of software exist to help automate a lot of the work and can save finance teams or founders a huge amount of time and energy.
Most entrepreneurs are experts in product, engineering or marketing - not finance. 82% of business failures are due to poor cash management. Stop spending hours trying to decipher your raw accounting data. Turn them into accurate and actionable pieces of financial insights by automating these processes. That’s why we created gini– we want to empower small businesses by providing the insights and tools that large corporations have. Get the help you need to manage your business spending and not run out of cash.
Get access to a solution that uses real time financial data to help Founders make better decisions, share reports with their stakeholders, and access growth capital money more easily. Start your 14 day free trial of gini today.
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