The Importance of Cash Forecasting for Small Business

cash flow analysis for small business cash flow forecasting

Running a business takes dedication, hard work, and a lot of strategic decisions. To successfully turn a profit and keep the doors open, small business owners must work together with the accounting and finance teams to effectively analyze and manage cash flow. However, finding the time to keep up with the daily recording and analysis of cash can be overwhelming for even the most seasoned business owners. 

One important function of the bookkeeping and accounting team is to understand exactly how much cash the business has presently and report any predicted shortages or surpluses in the coming months.  That’s where an organized cash forecasting system can help. Having a good handle on daily cash management and future cash needs will allow the organization to continue to operate as it was intended to do so.  

What is cash forecasting?

Cash forecasting tells you how much cash the business has and how much, if any, money will need to be contributed or can be distributed in future time periods. Forecasting the cash flow and regularly updating the forecast, or budget, with actual financial figures, as periods are completed, allows the business to track revenue coming in and the operational and debt expenses going out. A detailed cash forecast program or spreadsheet gives decision-makers a fast look at how each transaction is affecting the actual bank balance for the current future time periods. 

A forecast acts as a rolling budget. In fact, typically a cash forecast is built using the income and expense budget, or predictions, for the year. The rolling budget is then updated monthly as actual numbers become available, providing a good estimate of what the year-end net income and cash balances will be.  An updated cash forecast can give a snapshot view of the company’s financial health.

Why do you need a cash forecast?

The primary reason many organizations rely on a cash forecast is to avoid unexpected cash shortages. Periodically updating the budgeted income, expenses, and cash balances allow the bookkeeper, accountant, and managers to prepare for future cash needs. By continuously updating budgeted figures, business owners can rely on at least a 30-day notice for cash needs. 

A cash forecast is also a great way to see any variances or missing expenses as they arise. For example, if a cash forecast kept in an Excel spreadsheet is updated monthly with each expense line item, then the accounting team can clearly see that a budgeted expense, like insurance, has not been paid yet. Perhaps the invoice did not come, or it did, and the due date was misinterpreted; either way cash forecasting would quickly show that the insurance expense has not been covered for the current month. 

Tips for working with cash flow analysis

By now, you may realize that a cash forecasting system can help your business more efficiently manage cash. However, knowing where to start can be an overwhelming task. Here are some forecasting tips that are sure to have a positive impact on your business’s productivity.

  1. Start with an approved budget – Trying to create reliable projections with an unreliable budget is impossible. Instead, first create a budget for the next month, quarter, or year. The business owner or finance manager should approve the income and expenses shown in the budget. Then updating the cash flow, will be as simple as confirming correct projections and adjusting amounts that have changed. 
  2. Add a forecast to monthly financial statements – Most businesses close each month, or other designated time period, and compile a financial package. The package may include the income statement, balance sheet, bank statements and reconciliations, and any other standardized reports. Add the cash forecast to the regular financial reports so the end users can easily reference future cash needs when reviewing the business’s financial position. 
  3. Consult an expert – Don’t be afraid to seek outside help. There are many benefits to outsourcing bookkeeping and accounting tasks like cash management, budgeting, and forecasting. Allowing a full-service accounting service, like Edge Capital, to manage cash projections will free up time and resources in your business, ultimately increasing productivity. 

Improving Your Bottom Line

Bank balances, monthly expenses, and collected revenues are always going to fluctuate. Very few businesses can completely adhere to a budget, but cash forecasting can help your team efficiently manage receivables, payables, and future cash needs. Give us a call today to learn more about how Edge Capital can assist your business with operational bookkeeping and cash forecasting needs.