By Carlos Salgado, CPA, MSA – Supervisor, Tax
The impact of COVID-19 on businesses has been substantial and it has upturned the notion of “business as usual.” In addition, inflation is projected to continue to rise in 2023. Regardless of whether your business thrived during those unusual times or is still currently struggling, the changes in today’s market have been significant. Many business owners have found that forecasting cash flow has helped them anticipate potential shortfalls and plan accordingly to cover difficult periods.
Cash flow forecasting, even in unusual times, offers your business several advantages. It enables you to avoid making rash decisions and protects your business in the long run. You can make informed business decisions based on the timing of your cash flows and adjust your future working capital needs before you need the funds.
One area to improve cash flows is to focus on customer credit. Offer customers appropriate credit terms, based on their payment history. Identify late-paying customers and take action to obtain customer payments promptly. Consider offering discounts for faster payments. The use of credit card payments from customers may improve timely payments from customers.
Some of the banking and financing benefits of cash flow forecasting include:
- Saving money over time by avoiding late fees and bank charges from overdrafts
- Preserving your company’s good credit standing by reducing or eliminating late payments and overdue bills
- Obtaining or increasing a line of credit before your business needs the funds to support operations
- Paying down high-interest rate debt
- Investing excess cash to earn interest through vehicles such as liquid money market or sweep accounts
- Deferring major expenditures is a great way to improve cash flow
- Inventory management is a good tool for improving cash flows
- Negotiate better terms from vendors
Getting Started
Performing cash flow forecasting is easier than you might expect. There are many software programs and tools available such as QuickBooks, Pulse, Dryrun, and Float, or you can even use a simple spreadsheet to track and plan cash flow. Cash flow tools can be linked to other business software such as the Hubdoc document storage program and apps such as Expensify and Bill.com. The key is having a clean and current set of books to obtain meaningful information from the data.
The steps to follow to perform cash flow forecasting are straightforward:
- Start by determining the time period that best suits your business, such as weekly or monthly. This may depend on how often you bill customers, your payment terms, and how often you pay your company’s vendor invoices.
- Begin with the cash balance held in the bank and add in anticipated cash receipts from customer payments, draws against your line of credit, cash credits, refunds, and other inflows.
- Subtract payments made for rent, credit cards, utilities, vendor payments, and other cash outflows.
- Your cash inflows should meet or exceed your cash payment requirements. If you foresee a shortfall, consider how you can address it by reducing expenses, pushing for faster customer payments or drawing on your line of credit.
- Extend your forecast at least two to three months into the future to establish a rolling outlook for the quarter. Update your forecast regularly, this could be on a monthly or bi-weekly basis, whichever suits your business best.
Businesses need to access all the planning tools in their arsenal during trying times. Cash flow forecasting enables you to take a proactive stance and to better understand your future cash needs and potential spending gaps. Using cash flow forecasting will allow you to avoid surprises and make better business decisions.
Do you have questions on how your business can use cash flow forecasting? Or would you like help from an expert in performing cash flow forecasting? Contact me or another member of the MichaelSilver team with any questions or to obtain help regarding your cash flow forecasting at 847.982.0333. We are here to help.
Carlos Salgado, CPA, MSA – Supervisor, Tax, works with mid-size enterprises focusing on flow-through taxation within a variety of industries including, manufacturing and distribution, professional services, real estate, and retail. He has provided accounting and tax services for over six years, including compliance, tax planning, and management consulting. Carlos is a member of the AICPA and ICPAS.