Optimizing Your Business Cash Flow with Catalyst – Part 3

A cash flow forecast can be a document or software showing your cash inflows and outflows. Setting one up helps with liquidity planning, identification of potential shortfalls, debt reduction, and cash flow timeline challenges.

Start by evaluating your goals and thinking about what is within your control. Precisely, you can only control the money that goes out and not what is coming into your business.

Direct/Indirect Cash Flow Forecasting

Two forms of cash forecasting exist, direct and indirect. The former is an ideal measurement for short-term liquidity and aims to identify the exact dates on which to expect payments. In comparison, indirect forecasting is more suited to long-term planning. 

It relies on different financial statements, including profit and loss and the balance sheet. It is valuable when a business needs to examine long-term transactions and other cash flow aspects like loans and investments.

Cashflow Optimization

Determine your net cash flow by summing up the cash flow from all your business activities, i.e., operations, investments, and financing. A positive total is an indication of positive cash flow and vice versa. 

Next, decide whether to automate the cash forecasting process. You might find it tempting to rely on a spreadsheet as it depends on your inputs, keeping you abreast of all transactions. However, you run the risk of inaccurate forecasting due to human error, especially if there are any time constraints. It would be best to switch to software as it is more efficient.

Check for any possible errors. The most common mistakes observed during forecasting are a lack of awareness of tax liabilities, sales overestimation, inaccurate figures, unpaid invoices, outdated systems, and failure to use the bank for business transactions. 

Next, assess the health of your business by examining the cash flow statement. A positive cash flow is an indicator of business viability. Moreover, with a stable cash flow, your business can obtain financing to support expansion and manage to pay it off through investments and operations.

Lastly, monitor the cash forecast while following the best practices in forecasting. The accuracy of a cash forecast guarantees success in the long run. We encourage the following best practices to improve your cash forecasting. Establish clear lines of communication among team members. 

Also, it is always ideal to remain realistic by under-promising instead of the opposite. Carry out different forecast scenarios, explicitly identifying your best-case and worst-case situation. 

Stay on top of industry challenges to avoid falling into common cash flow traps. Build your team’s capacity by investing in external cash flow training. Finally, leverage all the available experts, including your bank advisor and your company’s accountants, as they will be valuable when making big company decisions.