5 Ways to Improve the Accuracy of Your Cash Flow Forecast

Author: Caron Beesley | November 11, 2015

Protecting cash flow is king. If money isn’t coming into your business at a rate that helps you pay your bills on time, then the consequences can be severe.

To ensure proper cash flow management, you need to monitor it. This is where your cash flow forecast comes into play. But the usefulness of that forecast depends on its accuracy.

While no crystal ball can help with this task, there are some things you can do to make sure your forecast is as accurate and helpful as possible.

Here we go.

1. Analyze Your Business Indicators
What’s happening with your sales pipeline? What’s going on at various stages of your sales funnel? This information will help you gauge if and when you may need to make cash outlays to invest in business growth or support the sales cycle such as hiring staff to support upcoming deals.

2. Estimate Your Weekly/Monthly Sales
Use this data to gauge when revenues will flow into the business. Of course, revenue on the books doesn’t always account for the fact that the customer may not have paid you for it yet (so bear that in mind). You should also factor in any costs that may impact those revenues, such as marketing, new product development, and so on. This exercise will give you some assumptions to play with.

3. Organize Your Expenses into a Budget
Part of managing cash flow is having a firm grasp of your anticipated expenses and when they must be paid. Your budget should contain both fixed and variable expenses. This exercise will help you understand your obligations and better plan for expenditures.

4. Wrap Your Arms Around Customer Payments
Collections can be a big headache for small businesses and is one of the number one reasons for cash flow problems. Even if you’ve got all of the above points under control, a late paying client can really mess with your cash situation.

Be diligent about collections. Use your contract to state your terms, reiterate it on the invoice.

Find out if there are easier ways of getting paid than snail mail (PayPal, credit card, online payment services like Bill.com, or traditional electronic funds transfer). Use your accounting system to help automate the process. FreshBooks, Xero, and the like, provide transparency into the entire invoicing process and do the job of collections monitoring and chasing, so you don’t have to.

5. Maintain Your Cash Flow Forecast
Whether you use a spreadsheet or your accounting software, make a habit of regularly updating your forecast. Compare your forecasts with your actual cash flow situation (you can use the cash flow statement to do this). You’ll soon find that you start to see trends and patterns, such as how promptly each client pays you, and who is consistently late so that you can take steps to mitigate or fix these problems.

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