In this series of “Cash Forecasting Basics” we’re going to look at a few of the key steps to budgeting (aka projecting or forecasting) your company’s cash needs.
Arriving at an accurate cash budget requires the following main components:
1. Forecasting the collection of current accounts receivable
2. Forecasting the payment of accounts payables
3. Forecasting the payment of payroll, expenses, capital payments, etc.
But before we get into the basics, let’s talk a bit about why a cash budget is important and what it should look like.
Forecasting cash requirements and anticipated cash flow on a weekly, monthly, and yearly basis will give your business the tools to make better business decisions and head off problems before they arise. This requires a team effort between the managers of your business working with the CFO, to forecast and plan for future billings, collections, payables, costs and expenses. Having this detailed cash roadmap will allow you to manage debt effectively, plan for the use of excess cash, and as already stated, head off problems before they arise.
Establishing these projections, along with cash dashboards, gives you the tools to be in control of your business. Being in control means keeping your line of credit at optimal levels, understanding the necessary goals of your accounting function, and planning proactively for the uses of cash.
By having a strong cash management system, you can manage your bank line of credit or other debt to minimize interest payments. This will improve your future cash position and also improve your P&L. By deeply understanding your projected cash position, you can also invest conservatively in short-term liquid assets, thereby increasing your future cash position even more.
But the largest benefit is without a doubt the ability to insure that cash is available to meet short-term working capital needs. (Working capital is the cash needed to support your business operations.)
These needs include payroll, utilities, rent, payables and a slew of other SG&A expenses. Not understanding your working capital requirements, and how your collection cycle could impact your ability to meet them, can cause serious pain. By charting out your future cash inflows and outflows, you can spot trouble areas before they become problems.
If you are not planning your cash flow, then do you really know what waits around the corner?
What if you take on a new customer?
How will that impact your cash position and your ability to serve your existing customers? Without a good cash management system, it is difficult to truly understand.
To learn how to effectively manage and get your cash flow under control in your business, download our FREE system Cash Flow Clarity.
Next up, Part 2 on “Projecting Accounts Receivable Collections”