How to forecast future cash flows
Without a doubt, maintaining a healthy cash flow is one of the most important factors in the success or failure of any small business. It’s a good idea, but how do business owners ensure the money coming in and the money going out lead to a positive bank balance at the end of each week, month or quarter? Easy. With a bit of planning – in the form of a cash flow forecast.
Cash flow forecasting is a simple way of predicting where your cash flow will be down the track – without using a crystal ball. It is an estimate of the amount of money you expect to flow in and out of your business and usually covers the coming 12 months, but it can also cover shorter periods like a week or a month.
A valuable planning tool for a business‘s financial management, cash flow forecasts will help you manage your cash flow because they are the key indicator of the future cash position of a business’s balance sheet.
The main goal of a cash flow forecast is to make sure the business has enough cash to meet its obligations and avoid funding issues over the short to medium term. But it can also form part of a long term plan and cash flow budget. Effectively, cash flow forecasts are a way to ensure improved management of working capital.