Taking a data-driven approach to managing your business will help you mitigate risk, avoid stress, and make strategic decisions. Creating accurate projections and forecasts will be essential to that process, and cash flow forecasting lies at the heart of many business decisions. In this article, we will review what it is, why it matters, and how to make accurate projections for your business. 

What is cash flow forecasting? 

Cash flow forecasting is a method for overseeing the liquidity of a business. While profit margins, sales numbers, and revenue can provide a snapshot of your business’s performance, measuring cash flow ensures that your company has enough funds coming into the account at the right times to make all necessary outgoing payments. It’s a balancing act between accounts receivable and accounts payable. When forecasting cash flow, an accountant or financial controller uses financial data from the business to show what the cash balance will be in the account at various future dates. 

How cash flow projection helps your business

Getting an accurate picture of your business’ liquidity is essential for informed decision-making. These cash flow forecasts can help you: 

• Identify when you may need extra funding by showing periods with less liquidity. This may point to a need for loans or investor support. 
• Choose when to invest in growth by timing it wisely. By understanding when your business will have extra cash, you can be more confident about deciding when to invest in the business. 
• Highlight upcoming risks and prevent surprises. When you have an idea of the next few months or even a full year, you won’t be surprised by your financials—a feeling that is often a source of stress for business owners. 

How to make cash flow projections

There are various time periods that a cash flow projection can measure: short-, medium-, or long-term, as well as mixed-period forecasts.

• Short-term forecasts manage daily cash needs and project a few weeks into the future. 
• Medium-term forecasts typically look ahead a full quarter (roughly 13 weeks). 
• Long-term forecasts may look ahead 12 months or more, supporting budgeting and planning. 
• Mixed-period forecasts will show a combination of the above timeframes and help to highlight daily activities, as well as a big-picture objectives. 

All cash flow forecasting will involve reporting on the following data points: 

1. Opening balance in the period measured 
2. Itemized receipts
3. Total receipts
4. Itemized payments
5. Total payments
6. Net movement
7. Closing balance in the period 

Managing all of these data points manually can be complex, so most businesses use bookkeeping or accounting software to run their cash flow projections. This saves time and also avoids costly human error. 

Elevate your business financials with Modern Receivable 

If you want a detailed view of your business’s cash flow and the ability to make accurate cash flow forecasts, integrate our automated invoice management tool into your financial operations. Modern Receivable manages your invoicing process from start to finish to ensure your business gets paid on time and remains liquid. With our data-driven dashboards and centralized communication tools, we’ve taken the friction out of the invoicing process. Learn more about how Modern Receivable can help optimize your business processes.