Best Practices for Cash Flow Forecasts

Cash flow is a top concern for most businesses today. Cash flow forecasts can help you predict potential shortfalls and proactively address working capital gaps. They can also help avoid late payments, identify late-paying customers, and find alternative funding sources when cash is tight.

Consider applying these four best practices to keep your company’s cash flow positive.

Many businesses are cyclical, and their cash flow needs may vary by month or season. Trouble can arise when an annual budget doesn’t reflect, for example, three months of peak production in the summer to fill holiday orders, followed by a return to normal production in the fall.

For seasonal operations — such as homebuilders, farms, landscaping companies, recreational facilities, and many nonprofits — using a one-size-fits-all approach can throw budgets off, sometimes dramatically. It’s critical to identify peak sales and production times, forecast your cash flow needs, and plan accordingly.

Effective cash flow management requires anticipating and capturing every expense and incoming payment, as well as — to the greatest extent possible — the exact timing of each payable and receivable. However, pinpointing the exact costs and expenditures for every day of the week can be challenging.

Companies can face additional costs, overruns, and payment delays. Although inventorying all possible expenses can be tedious and time-consuming, it can help avoid problems.

As your business expands or contracts, a dedicated line of credit with a bank can help meet your cash flow needs, including any periodic cash shortages. Interest rates on these credit lines can be comparatively high compared to other types of loans. So, lines of credit typically cover only short-term operational costs, such as payroll and supplies. They also may require significant collateral and personal guarantees from the company’s owners.

For most companies, the biggest cash flow obstacle is slow customer collections. Your business should invoice customers promptly and offer easy, convenient ways for customers to pay (such as online bill pay). For new customers, it’s important to perform a thorough credit check to avoid delayed payments and write-offs.

Another common obstacle is poor resource management. Redundant machinery, misguided investments, and oversized offices are just a few examples of poorly managed expenses and overhead that can negatively affect cash flow.

Your company’s cash flow needs today likely aren’t what they were three years ago — or even six months ago. And they’ll probably change as you adjust to the new normal. That’s why it’s important to make cash flow forecasts an integral part of your overall business planning. Contact us for more information.