Business owner

How to Optimize the Cash Flow Forecasting Process for your Small Business

February 24, 2023

Canadian Cash

Cash flow forecasting is essential for small business owners. Having enough cash in the bank helps ensure your business remains financially stable.

A good cash cushion can be essential to businesses of all sizes to help weather bad times and take advantage of opportunities.

With a well-crafted flow forecast, you can find ways to save money, plan for investments, and adjust to changing market conditions. Good cash forecasts result from following simple best practices that can help you optimize your cash forecasting process and ultimately improve the financial health of your business.

Advantages of a Good Cash Forecast

An accurate cash forecast can distinguish between a business surviving and thriving.

For small businesses, an accurate cash forecast can help:

  • determine how much cash you need on hand
  • anticipate shortfalls in paying suppliers and vendors
  • detect changes in revenue
  • identify opportunities to save money
  • plan for new products, services or marketing
  • manage cash flow to cover business expenses.

Best Practices for Managing Cash flow in your small business

If you’re looking to improve the cash forecasts for your business, it is vital to think of them as an essential process.

Start with Good Data

Your accounting and bookkeeping systems form the basis of your cash forecasting.

The first step in optimizing your cash flow forecasting process is to analyze your current cash flow, income and expenses. This first step will be simple if your books are up to date. 

If you use cloud accounting software for your accounting needs, you will have easy access to real-time data. Depending on your software, it can interface with your bank and provide cash balances at any time. By having reliable and up-to-date data, you can make sure your cash forecast is as accurate as possible.

Know your Best-Case and Worst-Case

After analyzing your current cash flow, you will forecast or predict your future cash flow.

Your baseline projections should consider any sources of cash inflows and outflows – your expected income and expenses, planned acquisitions or investments and loan repayments. Also, consider potential market or season changes that might affect your business in the near term.

It is essential to remember that your cash forecast is only an estimate of your future cash flow needs. Your baseline cash forecast may work out differently than you anticipated.

The risk is that you end up with either too much cash or too little cash for your needs.

Not having enough cash can be detrimental to your business. While having too much money is a good problem, you might have forgone expansion or growth opportunities while you sit on your cash cushion.

Consider the best-case scenarios of outcomes and the worst-case possible as you create your cash forecast. To protect yourself from fluctuations, you can use your cash forecast to create a potential target range.

Set a Target Cushion

Once you know your best-case and worst-case scenarios, you should set a target cash buffer or cushion. The cash cushion you select will help you if unexpected expenses arise.

The cash cushion may be based on the amount of money you would need to protect your obligations in the worst-case scenario. You want to keep this amount in reserve to cover any unexpected costs.

Update Forecasts Regularly

Building a cash forecast should be viewed as an ongoing exercise in your business. It is essential to review and update it regularly.

As you have new information, your cash flow forecast might change.

The process can seem tedious at first. But the good news it the more frequently you do it, the easier it will get!

How often you forecast your cash flow depends on your business needs. For some, that might mean updating forecasts daily, while for other businesses, the best cadence is weekly, monthly or rarely, every quarter.

Review your Forecasts

Once you regularly create and update your forecasts, you must check how well you predicted and anticipated your cash flow needs. Compare your cash forecasts to what happened in your business.

Your cash forecasts might be pretty accurate! This will give you peace of mind for the future of your business.

On the other hand, while reviewing your cash forecasts, you might find sources of cash needs you did not anticipate. These unplanned expenses can signal where your cash is going and either incorporate them into your forecasts or use the opportunity to eliminate unnecessary costs.

Streamline the Process

A vital part of the process is to streamline your cash forecasting. A streamlined process will help you save time and create more accurate forecasts.

Depending on the size and scale of your forecasts, several opportunities exist to simplify the process.

You can create a spreadsheet template that should automate your cash forecasting process. This will ensure you remember critical items, such as recurring expenses or payments.

Automating the process can help you save time and ensure that your cash forecast is always up to date. Automation also allows you to easily track cash flow changes and ensure that your projections are as accurate as possible.

Set up Alerts

You can also see set real-time alerts whenever your account balance hits a certain threshold. Your bank might offer this service or an accounting software integration, primarily if you use cloud-based accounting software.

Setting up these flags can give you peace of mind that you will have enough cash in the bank when needed.

Delegate the task

Cash forecasting is a vital task for your business. You might assign the responsibility to a trusted employee or partner. Your accountant or bookkeeper may be well-equipped to help you set up or update your cash forecasts. By automating and delegating the process, you can free up time to focus on other business areas.

Cash Forecasting for peace of mind.

Cash forecasting can seem like a daunting task for business owners who have lots to juggle. A good cash forecast can be a great tool in your business to anticipate shortfalls or identify new opportunities. 

Whether you dedicate a little time and energy to the task or find an expert, an accurate cash forecast can help your business in the long run. 

Contact KSSP Partners LLP in Markham for Cash Flow Management Solutions

At KSSP Partners LLP, our experienced Chartered Accountants provide modern accounting and advisory solutions to meet the needs of your growing business. Our knowledgeable and professional accounting team at KSSP Partners LLP can offer clients in Markham, Toronto and across Ontario innovative accounting and advisory solutions. To learn more about how we can help you and your business with all your cash forecasting and accounting needs, contact us online or by telephone at 289-554-5997.