We’re now in an era of financial scrutiny, where companies seek new revenue streams, expenses are dissected, and profits can fluctuate for companies.
Following an increase in financial implications and restructurings during Covid, from Bounce Back Loans, assets on hire purchase, deferred taxes, and altered payment terms for customers and suppliers, profit can often give a false story of the underlying issue – cash.
In today’s Fintech Friday, we look at how an accurate cash flow forecast is important for giving your business the visibility needed to use cash effectively.
Benefits of cash flow forecasting
Anticipate cash shortages
Forecasting can help predict periods of negative cash flow, allowing you to act early to avoid any repercussions, such as missed payments to suppliers or employees.
Obtain financing
Anticipating cash shortages may flag periods where financing is required. Often lenders and investors request a cash flow projection as part of the application. A routine and regular cash flow forecast can demonstrate progressive management and potentially increase the chances of securing the additional financing.
When to use excess cash
On the other hand, cash flow forecasting can also help predict periods of positive cash flow. This allows you to make decisions about how to best utilise the extra cash, such as investing it, paying off debt or returning it to shareholders.
Identify customer issues
By using software to assess cash inflows and outflows, you can start to see trends in your customers’ payment histories, alongside evaluating your dependency on that client. If one of your larger clients is gradually increasing their payment days to you, this may be an indication to run a credit check, as the issue could have a profound impact your company.
Recurring customer issues could relate to other problems within your payment services – i.e. how easy is it for someone to pay you? It varies by sector, but sometimes the solution could be as simple as providing an electronic payment link such as Stripe or Paypal to your invoices.
Identify supplier issues
Cash flow software will also assess your dependency and payment terms for your suppliers, tracking cash outflows to ensure financial stability. With larger clients, this could be reviewed to see where you can maximise payment terms where required. You could also use the historic data showing early payments to negotiate different pricing structures.
If there are significant dependencies on certain suppliers, it may also be wise to run a credit check on them, as a broken link with a supplier could cause just as much of a detrimental effect on your company as a broken link with a customer.
Predict seasonality
Cash flow forecasting helps predict seasonal fluctuations in your future cash flow, which is vital for companies that have uneven revenues throughout the year. The additional insight allows you to plan for periods of low cash flow and ensure that you have sufficient cash available to meet your key obligations.
Address “What-if’s?”
Using forecasting allows you to see the financial impact of the questions often discussed around the boardroom table:
- What if we purchase a new piece of plant and machinery that is going to generate revenue?
- What if we introduced a salary bonus scheme based on Sales KPI’s?
- What if we open a new office?
- What if we launch a new product?
- What if we pay additional dividends this period?
Using a cash flow forecast example, you can visualize the financial impact of different scenarios and make informed decisions.
Using formulae within the apps, you can link dependent account codes for all the above scenarios and more, to give you foresight in any decision you make.
How can we help?
Overall, cash flow forecasting is essential for maintaining financial stability and making informed decisions. There is a common misconception that cash flows are only for addressing financial issues, but the reality is that it can be a critical tool for assessing growth opportunities or diversification.
For more information, contact our Digital Advisory Team by emailing fintech@haroldsharp.co.uk or call 0161 905 1616.