Cash Flow Forecasting
Forecasting cash flows is very important, as many businesses have failed due to lack of cash flow rather than lack of profit! Cash flow forecasting is absolutely essential while planning short or long-term funding requirements of any business. Cash flow forecasts are used to determine the amount of cash necessary in future by the business, to get through lean periods of low sales etc. cash flow forecasts are helpful in identifying the main areas of costs as well as help determine the total capital requirement of your business. It will be easier to apply for funds in advance if you use cash flow forecasts to ascertain how much cash will be needed at a given time.
Importance of Forecasting Cash Flows
By Forecasting cash flows accurately, a business will be guided in the right direction and will be sure to be on the right path for success, however if there are grave errors in cash flow forecasting, the consequences to the business can be devastating. Cash flow forecast help in planning and using the funds available at a given time in a way that best benefits the business. Fiscal management of a business is therefore made easy by using accurate cash flow forecasts. Good fiscal management is vital for success of any venture; hence forecasting cash flows accurately is imperative.
Cash flow forecasts have three major aspects, projected revenue, projected expenses and the balance. Make sure each detail is carefully studied and used, such as when a certain amount of money is due, when exactly certain bills have to be paid etc. Forecasting cash flows serve as an early warning system when expenditure run out of control as well as indicate when sales targets are not being met. It helps to identify periods where there will be a shortage of cash and to take necessary action as well as help invest temporary cash surpluses. These forecasts can be used to apply for loans when necessary, helping convince loan officers that there will be cash to repay the loan quickly.
Forecasting cash flows can be done manually or by using various software’s that are easy to utilize. Once you have a forecast check it to see that any detail has not been omitted and that any new information has been updated and the cash flow forecasted accordingly. Make sure that you review the actual results with the forecast to check how accurate the forecast was. Forecasting cash flows have to be done periodically. It helps to determine the amount of cash available and will help to determine the best way the funds available can be used. When the cash flow of a business is planned and well coordinated, the functioning of your business will be smooth.
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