For small and medium-sized businesses (SMBs), managing cash flow can often feel like a never-ending juggling act. On one hand, it's important to ensure that there's enough money to cover expenses and keep the business running smoothly. On the other hand, there's an ongoing need to invest in growth and expansion. That's where cash flow forecasting comes in.
In this post, we'll take a closer look at cash flow forecasting and why it's so important for SMBs. We'll also explore the benefits of cash forecasting for organizations, along with some of the pain points that finance leaders may encounter. Finally, we'll discuss the importance of cash flow forecasting automation and why businesses should invest in cash flow forecasting software to streamline their processes.
What is Cash Flow Forecasting?
Cash flow forecasting is the process of estimating future cash inflows and outflows for a business. This can include everything from accounts receivable and accounts payable to loans, investments, and dividends. The goal of cash flow forecasting is to provide a clear picture of the company's future cash position so that business leaders can make informed decisions about budgeting, investing, and cash management.
Why is Cash Flow Forecasting Important for SMBs?
Cash flow forecasting is especially important for SMBs because these companies typically have limited resources and may be more vulnerable to cash flow fluctuations. By forecasting cash flow, SMBs can better plan for the future, anticipate potential cash shortfalls, and make strategic decisions to keep the business financially stable. Cash flow forecasting can also help SMBs identify potential growth opportunities, as they'll have a better understanding of their available resources and cash flow trends.
BC Krishna, Founder & CEO of Centime, states, "Every business spends. You're spending on people, on marketing, on products, on inventory. You're usually spending ahead of any cash that you receive. This gap is called the cash flow gap. The longer the cash flow gap, the more capital you need on your balance sheet to be able to tide out the times. The obvious goal is to reduce the cash flow gap as much as possible, and in order to do that, businesses aim to slow down payables and speed up receivables. But sometimes you just do not have those degrees of freedom. You may not have the volume of payables and may have a business that needs additional capital to grow, so that's when you tap into credit."
This is where cash flow forecasting is a key solution.
7 Key Benefits of Cash Flow Forecasting for Organizations
The benefits of cash flow forecasting are numerous. Here are just a few:
- Better identify & plan for cash shortages: forecasting provides a realistic picture of the company's future cash position and allows for more accurate budgeting. This helps businesses anticipate potential cash shortfalls, plan ahead for expenses and investments, and make sure they have enough funds to keep operations running smoothly.
- Efficiently manage working capital: working capital is effectively managed through cash flow forecasting, by understanding the cash conversion cycle and the overall trends in current assets and current liabilities.
- Predict receivables & payables: Operational cash flows like A/R and A/P are hard to forecast due to numerous areas that drive variability, such as customer payment behavior, credit quality score, different payment methods, rebates, time of purchase and delivery of goods, etc. Including these variables in the forecast will help you stay prepared for future events.
- Mitigate risks by hedging: understanding the potential cash effects of changes in interest rates, foreign exchange, or commodity price volatility can inform various risk mitigation strategies, including hedging.
- Make investment & funding decisions: accurate forecasts enable investments, and funding can be done smoothly to ensure short-term and long-term objectives.
- Improve financial visibility & reporting accuracy: accurate cash flow forecasts provide finance leaders with the data needed to make well-informed decisions. They can also help improve financial visibility, as businesses can easily track their cash flow and report on it accurately.
- Better monitor cash KPIs: cash flow forecasting allows businesses to monitor and track key performance indicators such as gross/net burn, cash runway, and more. This makes it much easier to foster a "cash culture" with the business.
Pain Points of Cash Flow Forecasting
While there are many benefits to cash flow forecasting, the process can also be challenging for finance leaders. Some of the common pain points of cash flow forecasting include:
Time-consuming manual work
Cash flow forecasting can be a time-consuming process, especially if it's done manually. For most CFOs and finance leaders, collecting data from multiple sources, manually entering them into spreadsheets, and constantly updating the forecasts is too much upkeep to maintain.
Accuracy & consistency
Manual cash flow forecasting can be difficult to keep up with and often becomes inaccurate over time. This is because manual processes are more prone to errors in data entry or incorrect assumptions about future trends.
Lack of data
Accurate cash flow forecasting requires good, reliable data. If the data that's available for SMBs is incomplete or inaccurate, it can be difficult to make accurate predictions about future cash flow.
Founder & CEO of Universal Information Services, Todd Murphy, says, "If cash flow forecasting is simplified and I can understand it, I will use it, and I can better plan for the future. Simplifying cash flow is the takeaway word for it." Watch our webinar on Improving Cash Flow Forecasting here.
Fortunately, there are now tools available that can streamline and automate the cash flow forecasting process.
Cash Flow Forecasting Automation
To streamline the cash flow forecasting process, many SMBs are turning to automation. Cash flow forecasting software can help finance leaders manage data, build accurate forecasts, and report on key metrics. By automating the process, businesses can reduce the time and resources required for cash flow forecasting while improving accuracy and reliability.
Why SMBs Should Invest in Cash Flow Forecasting Automation
Investing in cash flow forecasting software is one of the best ways for SMBs to improve their financial management. With the right software, businesses can:
Improve accuracy: Cash flow forecasting software uses advanced algorithms and data analytics to build accurate forecasts. This reduces the risk of errors and ensures that businesses have a clear picture of their cash position.
Save time: By automating the process, cash flow forecasting software can save finance teams a significant amount of time. This allows them to focus on more strategic activities and improve overall financial performance.
Gain insights into future cash flows: By analyzing data from multiple sources, cash flow forecasting software can provide valuable insights into cash flow trends, business performance, and growth opportunities.
All-in-One Cash Forecasting Automation with Centime
Integrated cash forecasting and AP/AR solutions like Centime are the obvious choice for finance professionals and leaders looking to gain insights into future cash flows without putting in manual work.
Centime's cash forecasting software allows CFOs to:
- Obtain aggregated up-to-date views of cash across all bank accounts
- Automatically create a rolling 13-week cash forecast
- Dive into projected cash inflows & outflows to gain insights
- Customize & change forecasts to match business goals
- Prioritize AR collections based on cash needs
- Utilized CentimeCredit to meet short-term funding needs
- Transfer money between accounts to optimize yield & liquidity
- View cash reporting by business category type
- Compare cash performance by time period
In addition to its robust cash flow forecasting features, Centime is the only truly integrated cash management solution for all AP, AR, and working capital needs. Learn more about Centime here.
Cash flow forecasting is a critical tool for SMBs looking to manage their cash position and make informed decisions about their financial future. While there are challenges to the process, including lack of data and unforeseen events, investing in cash flow forecasting software can streamline the process, reduce risk, and improve overall financial performance. By embracing cash flow forecasting and automation with tools like Centime, SMBs can gain a competitive advantage, improve their financial health, and position themselves for long-term success.