Cash Flow Forecasting Effective Ways of Getting Ahead

Cash Flow Forecasting Effective Ways of Getting Ahead

Selective Invoice Finance provides an effective option for any company looking to leverage the value locked within accounts receivable, though to fully capitalise on this value it is extremely important for businesses to gain an understanding of the ins and outs of cash flow management.

Proper cash flow management introduces a number of benefits for the firm, including a comprehensive understanding of potential obstacles and opportunities that may arise, and a firm grasp of the company’s current financial standing to increase the likelihood of survival by reducing uncertainty.

This article will outline four of the most effective ways to manage cash flow (CF) that, whilst simple, require consistency to reach their full potential.

1. Maintain a Cash Flow Forecast

A CF forecast is an estimate of the amount of money a business expects to flow in and out of their ledgers though receipts and payments. Traditionally the forecast looks 12 months into the future, though because of the drastic variation CF can undergo over time, the CF forecast should also cover the coming weeks and months. As the forecast works with estimate amounts, it should be revised regularly to include actual earnings and costs to maintain accuracy. By doing this the firm becomes aware of its current and future cash situation, allowing for more effective decision making during vital stages of growth.

2. Plan for Different Scenarios

While it is not possible to plan out all possible scenarios, business owners can minimise the shock of extreme situations by planning for all known eventualities – both positive and negative in nature. By doing this the firm prepares itself, both mentally and financially, through projections which address any issues that may arise. Mental preparedness reduces the stress decision makers in the company face when things go wrong, and financial projections help a company identify the key level of cash holdings they should maintain to ensure that when worst-case scenarios occur, survival is possible.

3. Understand the Peaks and Troughs of your Industry

Each industry is unique, laced with their own ambiguities that can negatively impact businesses at any time, many of which will have been experienced by other industry players. Rarely will a firm operating within an established industry cross paths with an issue that breaks the mold. Using this information, any growing firm is able look to others in the market to identify trends unique to the industry. By doing this, similar to planning for best- and worst-case-scenarios, the firm will gain a clearer understanding of what lies ahead of them on their journey.

4. Building Strong Relationships with Stakeholders

As payment terms are predefined by both entities, it’s common courtesy to expect cash to pass between hands when the deadline is reached, however, any experienced business owner will tell you this isn’t always the case.  Many businesses suffer from poor CF which can, in turn, be passed on to suppliers when a payment date comes-and-goes without cash passing between hands. Though there is no perfect solution to this situation, one simple step creditors can take to reduce its impact is by building strong relationships with debtors.

These relationships will not alleviate real cash flow woes, but at least with a strong relationship the late payee may be more likely to provide a warning, allowing for the planning of alternative plans of action.

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