More and more, cash flow forecasts are in demand from business owners who want to responsibly manage their cash and make informed business decisions. This creates a growing need for a new accountancy service. And the best part? You no longer need to use spreadsheets to build a forecast and keep it up to date.
Why cash flow forecasting is in demand
Cash flow forecasting is in demand now more than ever due in part to the rise of cloud accounting. With fully cloud-based tools such as Xero, QuickBooks Online and FreeAgent, financial information is now more available than ever to business owners. Yet none of these tools properly tackle the need for a granular cash flow forecast that takes into account actual data around bills and invoices.
Business owners, now used to instant financial visibility, are left with half the picture, leaving a clear gap for accountants to fill. With cloud accounting tools at accountants’ fingertips, previously arduous manual tasks such as cash flow forecasting can now be much more streamlined.
A second draw for business owners to keep an eye on cash are the lessons learned since the 2008 financial crisis. In that time, businesses closed at an unprecedented rate due to cash flow issues. According to the Huffington Post, more than 170 million small businesses in the US went under between 2008-2012.
This means that many business owners as well as investors have recent experience of being part of businesses that struggled with cash, and do not want to repeat past mistakes. Having a continuously updated cash flow forecast is one of the first steps towards good governance.
Why business owners need visibility on their cash flow
There are numerous reasons why business owners and their CFOs need to keep a close eye on cash movements.
Forecasting should be the first step
No matter what your clients are planning for their business, a cash flow forecast should be the start to that journey. Understanding whether or not plans are feasible in cold hard cash, rather than more idealistic P&L, is crucial to avoid disaster.
Gaining trust from stakeholders
Investors and loan providers have a clear stake in a business’s success and are free from involvement in day to day firefighting. This means that they tend to think in terms of the big picture. They want their CEOs to do the same, and have a clear idea of where the business is going and how it will reach its ambitious targets. Providing investors with a cash flow forecast for a best, average, and worst scenario will instill confidence and trust in the CEO’s abilities, and make it easier to raise more investment.
Identify shortfalls ahead of time
Forecasting a client’s future bank balance allows you to help them see when they may have a cash shortage that could cripple their business well in advance. It also gives them enough time to do something about it. By identifying a cash gap ahead of time, your clients might be able to access better loan rates or be able to tighten up their payment terms to bridge the gap. As the saying goes, forewarned is forearmed.
Pay suppliers on time
Whether your clients pay their suppliers on time will impact their reputation, and may affect whether or not suppliers continue to work with them. Helping them understand how much cash they will have in the bank will show your clients whether they can afford to pay on time, or whether they need to manage expectations with suppliers.
Track spending and stay within budget
Having an overall idea of how much comes in and out of your business is great, but are your clients always right? A profit and loss or a balance sheet will give your clients a snapshot of what is happening right now, but it won’t show the future in terms of the cash they will actually have. In other words, it won’t be ‘real.’ With a cash flow forecast that has been updated with actuals, your clients can compare their best guess to what really happened, helping them to see if they need to update their forecasts.
Get on top of accounts receivable
By doing a cash flow forecast that takes into account invoices for debtors and bills from creditors, you’ll be more easily able to help clients identify who is consistently paying late, enhancing their credit control process. You could go a step further to model different payment dates on overdue invoices to see the true impact of late payments.
How to avoid cash flow spreadsheets
Cash flow spreadsheets are a nightmare. They are hard to maintain and can be very error-prone. A way to avoid that hassle is to use a cloud-based tool like Float to connect to your accounting software (Xero, QuickBooks Online or FreeAgent). Float automatically imports your accounting data every day to populate your forecasts with actuals, saving you time and keeping your clients happy. They report that customers who used to spend 1-2 days a month on their cash flow forecasts are able to reduce that to a matter of minutes using their tool.
This was a guest post from Float. To find out more about their award winning cash flow forecast software, click here.