Supply chain interruptions, changes in consumer demand, or even an unanticipated worldwide pandemic—there are many factors that can interrupt a business’ cash flow and impact future profitability.
To protect against unexpected business interruptions like these, companies need to become proactive with their cash flow. Implementing cash forecasting can help a business protect its profitability and growth potential.
Businesses need cash to support growth, so suddenly uncovering an unanticipated deficiency is never a good surprise. By nature, it’s a situation that can hinder the future outlook for the organization and even lead to business failure.
On the other hand, predicting cash shortages allows the business to prepare and even stretch cash to cover shortfalls, protecting profitability while still supporting growth. This is where cash forecasting comes into play.
Forecasting allows the business to visualize future peaks and valleys in cash flow. This visualization starts by gaining an understanding of accounts payables and receivables in relationship to past and current trends. This information then makes it possible to create a model, depicting when future cash receipts and cash expenditures are most likely to occur.
Forecasting also makes it possible to pinpoint when shortfalls are most likely, allowing businesses to take action and mitigate the impact. Increasing sales, reducing spending, getting paid faster, paying vendors with an extension of credit, or tapping into a line of credit to increase cash position are all valid methods for addressing cash flow shortages.
When paired with budgeting, cash flow forecasts can help businesses execute on tactical decisions, such as when to buy new equipment, invest in marketing, grow the sales team, or even expand into a new market. By understanding the overall goals for the year and overlaying the cash flow forecast, businesses will be able to confidently chart a path toward growth and set milestones to execute the plan.
The number of businesses that are now using some form of cash forecasting is on the rise, jumping from 43% in 2019 to 56% in 2020. However, manually predicting the peaks and valleys associated with cash flow can be time consuming, complex, and prone to errors.
For many businesses, the process is complicated by the addition of multiple banking relationships, fluctuating bills, invoices, and credit lines, as well as a general ledger that may connect to other systems. Pulling all these disparate elements together is a challenge and can impact the accuracy of the cash forecast.
Fortunately, in today’s technology-enabled world, there are tools to aid businesses in cash forecasting, making it simpler and faster to address shortages and improve future business prospects.
Cash forecasting solutions make it simple for businesses to identify the ebbs and flows in cash flow. Advanced technologies review past patterns against current accounts receivables and payables, as well as other factors, to paint a picture of future cash flow.
For example, by applying artificial intelligence (AI) and machine learning to accurate data, businesses can predict even minute details, such as how many days it will take customers to pay an outstanding invoice. Gaining insights like these at the right time is critical to understanding cash flow.
However, many solutions on the market today only address a few elements of the cash flow cycle, leaving businesses to manually plan and put in place a strategy for addressing shortages. To realize the most accurate and beneficial results from cash forecasting, businesses need a complete solution that can address all phases of the cycle. That means connecting the dots between banking relationships, general ledger data, customer invoices, bills to be paid, and industry insights—all from a single location.
Taking this approach and using advanced technologies, such as AI and machine learning, businesses can view as much as a 13-week cash flow forecast. Armed with this depth of knowledge, they can take proactive action to close liquidity gaps instead of waiting for the shortfall to occur.
Some of the steps a business can take include opening a traditional line of credit or utilizing a commercial card. Both instruments are useful tools designed to help businesses manage working capital and offset shortfalls. By paying a supplier with a card, for example, the business can extend payments by 25 to 30 days allowing them to cover dry spells in cash flow.
Overall, automating the cash forecasting process is a simple way to gain valuable cash flow insights, allowing businesses to identify when shortfalls will occur and to put a strategic plan in place to mitigate the impact and help the business continue to grow and thrive.