CEOWORLD magazine - Latest - Tech and Innovation - Forecasting Cash Flow: The Insights Necessary to Maintain and Grow Business

Tech and Innovation

Forecasting Cash Flow: The Insights Necessary to Maintain and Grow Business

Business Meeting

In times of economic uncertainty, forecasting cash flow is critical. Reviewing the company’s current and future spending habits adds a layer of predictability to business, and utilizing high-quality, timely financial data is key. Follow these steps to better predict cash flow and manage spend.  

Unsurprisingly, cash flow is frequently cited as one of the top reasons businesses fail. With deeper economic downturns likely ahead, forecasting cash flow—among other strategic finance initiatives—will be vital to surviving the ever-changing marketplace dynamics.

A solid strategy for forecasting cash flow will dictate your ability to respond to market fluctuations. It will also put your company in a much better position to combat rising uncertainty while the finance team looks for ways to build out more companywide efficiencies, reduce headcount strategically, and retain top talent companywide.

While there are different ways to ensure positive cash flow, leveraging high-quality and timely financial data can be a game-changer.

Data gives you visibility into which business areas are thriving and which need closer evaluation. Process mapping and scenario planning can also be beneficial, as these can help identify improvement areas and illustrate how inflationary periods can impact business. Finance leaders will prioritize spend control and budgeting along with these strategic insights around cash.

Analyzing a company’s current and future spending habits helps predict what capital will be needed to stabilize and scale.

Understanding the Benefits of Cash Flow Forecasting

Forecasting cash flow adds a layer of predictability to the business, as it shows the impact working capital has on your cash position. Knowing if your company has enough funds to run the business, expand efforts, or pull back on certain initiatives is always essential—even more so when a potential recession is on the horizon. It helps you foresee potential cash shortages and ensures you can take the necessary steps to sustain operations and continue growing your business.

The main benefit of forecasting cash flow for accounts payable is that it helps you avoid any unexpected disruptions. It also provides information on liabilities (e.g., costs and debts) that can help with cash management. And if you want to optimize how much money remains to spend on growth and investments, this data can be indispensable. Leadership teams can use this information to inform future decisions, while those in the startup space and early growth stages can better pinpoint the right time to commence with new rounds of funding.

Cash flow forecasting challenges will always be present. There’s inherent uncertainty surrounding payments, as you can’t control when any client pays an invoice. There will also be changes in the cost of labor, materials, and manufacturing—not to mention those seasonal rebates that often add even more variability to the mix. Then, there’s the potential for errors (i.e., duplications, incorrect invoices, etc.) that make forecasting cash flow seem like nothing more than a best guess.

Ensuring Proper Cash Flow Forecasting

The importance of cash flow forecasting shouldn’t be up for debate. Accurate accounts payable forecasts offer critical information into how much working capital will be available for growth and innovation after debts are paid. This data is imperative for strategic planning when businesses must rapidly adapt to changing market conditions.

To efficiently manage spend and predict cash flow, finance leaders can serve their organizations well by focusing their attention on the following areas:

  1. Invest in the right technology to support changing company goals.
    Automation allows your finance team to go from “bean counters” to “bean growers.” Building out a strong tech stack with AI-enabled capabilities elevates their roles, making them more strategic partners. More importantly, these employees can continue to grow alongside the company’s vision, and automation allows them to evolve with the business.
  2. Elevate finance roles to data storytellers.
    Finance data tells a story. It can help your organization drive value through budgets and projections to grow where needed. However, when there’s uncertainty about the future, being bombarded by large amounts of data can be overwhelming, leading to confusion and even analysis paralysis.

    Data should be analyzed and cleaned up before being sent to finance team members to be incorporated into decision-making processes. This task should fall to technology, as it can quickly and accurately parse through information and derive actionable insights for leaders in all departments—from administration and human resources to customer service, marketing, and sales.

  3. Improve predictability by reevaluating payments and collections.
    The cash flow cycle can be complex, as many moving parts are involved with moving money in and out of the company. Depending on your vendors and your relationships with them, you could negotiate new payment terms and try to put off some outgoing payments until your business is in the black. You may also improve cash flow on the other end by incentivizing early customer payments.
  4. Consider lending options prior to hard times.
    The best time to solve cash flow problems isn’t when issues arise. Lending should be used as a preemptive measure to weather storms. If your business is running at a clip or in the beginning stages of production, it might be a good time to borrow money. The same can be said for when your company needs a quick cash injection, as might be the case when several invoices are outstanding with your client base. You know the money will be there eventually, just not when you need it.

Without forecasting cash flow, you’re just increasing the chances that your business will run into troubles ahead. It’s important to implement the strategies necessary to help stabilize cash flow and add a layer of predictability, making it easier to maintain business growth—even during times of uncertainty.

Written by Paul Henderson.

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CEOWORLD magazine - Latest - Tech and Innovation - Forecasting Cash Flow: The Insights Necessary to Maintain and Grow Business
Paul Henderson
Paul Henderson is the global controller at Tipalti, a payment automation software that helps businesses manage their supplier payments operations by streamlining the AP and payment management workflow in one holistic cloud platform.

Paul Henderson is an opinion columnist for the CEOWORLD magazine. Connect with him through LinkedIn.