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Five Reasons to Improve Your Cash-Flow Forecasting

At its most basic level, cash-flow forecasting helps a business survive. By knowing exactly what cash you have coming in and going out and when those transfers occur, you ensure you have enough cash to continue operating from day to day.

But there are other, often related, reasons to improve your cash-flow forecasts, according to accounting and financial experts. Here are five important ones.

So you’re able to grow.

“As companies grow, you have to grow your infrastructure to support the growth,” says Michael Cole, audit principal at Southern California CPA firm Holthouse Carlini and Van Trigt LLP.“What happens sometimes is (businesses) are not planning their future cash-flow forecasts properly, and so they have short-term cash deficiencies.” For example, if you’re adding staff but sales receipts haven’t yet caught up, you may suddenly realize you can’t make payroll without changes to other cash outflows or inflows. “That means their (accounts payable) slips, or what can happen is they’ll have to take additional money out on their lines of credit, which also means they have more interest to pay,” Cole says.

So you can protect your credit.

Having an accurate cash-flow forecast can help you see ahead so that you know how you’re going to make payments in a timely manner, Cole says. “It’s really important if you want to be able to pay all of your debts and bills on time,” he says.

So you can correct course.

Related to the second point, having a good cash-flow forecast gives you time to make changes if you’re on a course for trouble. Many companies are obligated to provide cash forecasts to their lenders and report on and confirm that their performance is meeting the minimum criteria, said David Douglass, a partner with professional services firm Tatum. “Without a cash forecast process in place that is updated more frequently than the bank requires, it may be too late for the company to recover from a cash shortage or recover from having failed to meet minimum performance standards,” he says. “Banks -- and more importantly owners or boards of directors -- don’t like surprises like this, especially if there isn’t time to cure the problem or problems without jeopardizing the company’s existence.”

So you can save for the future.

Some business owners want to make regular, set contributions to savings or to retirement plans (for themselves or their employees). “If you’re not generating excess cash flow, you won’t have money for that,” Cole says. Refining your cash-flow forecasts to get the most accurate estimates possible is one way to know if you’ll have excess cash to contribute.

So you control the things within your control.

Sometimes, it feels like much of what happens in business is beyond your control – costs go up, customers inexplicably slow purchases. But business owners can control many thingsthat have a direct impact on cash flow, said Lauren Prosser, a manager in the advisory services group of financial information company Sageworks Inc. For example, simply getting accounts receivable paid earlier can have a fairly significant impact on cash flow over time due to the compounding effect, she said. “If you collect everything 12 days earlier, then today you have the same cash as you would have had today, plus what you would normally have had 12 days from now,” she said.

Perhaps you recognize the importance of an accurate cash-flow forecast but find it difficult to execute one. In upcoming posts, we’ll provide suggestions for improving cash-flow forecasts. But don’t be afraid to call in reinforcements. Your external accountant is likely well equipped with forecasting tools and eager to help you beyond your tax returns, Prosser said.

“It’s a thought process, and it often helps to have someone walk you through it,” she says.

So what are your biggest headaches when it comes to cash-flow forecasting?

Mary Ellen Biery is a research specialist at Sageworks.

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