There are some skills a new business can develop over time, getting better through practice. But there are other skills a business needs to excel at from day one or else it will face constant setbacks – which can be frustrating at best and catastrophic at worst. Cash flow forecasting falls squarely into the second category. It’s a skill every business needs as early in their journey as possible.
The reason why is simple: cash is the lifeblood of any business. Without it, no amount of hard work or bright ideas can save a business. Effective cash flow management starts by forecasting how much cash will be on hand so that businesses don’t exceed their means accidentally and tighten their belts unnecessarily. Getting a cash flow forecast wrong is also the quickest way to get into money problems. Instead of learning all this the hard way, startups should ideally get their first forecast right and every forecast afterwards.
Easier said than done, unfortunately. There isn’t a quick and easy formula for cash flow forecasting. Instead, there’s a mountain of details and considerations to compare against each other, along with a fair amount of guesswork. It’s no surprise young businesses feel uncertain about their forecasting and often get their predictions wrong. Fortunately, though, it doesn’t have to be this way. Complex as it may seem, cash flow forecasting is something any business can master at any stage.
The Uphill Battle of Cash Flow Forecasting.
For established businesses, cash flow forecasting involves analyzing data, reviewing historical trends, understanding customer payment patterns, and exploring vendor requirements and flexibility – then extending that analysis forward. Depending on the circumstances, it can involve deep data analysis, or a higher-level approach.
Forecasting is similar but different for early stage businesses. With little history to analyze, understanding cash expenditures by type is key. Some expenses, such as payroll, must be met. Others are more discretionary. It’s important to know where there is flexibility for both the initial commitment and the timing of payment. That process may involve studying past data, but more often it’s an exercise in differentiating between discretionary and non-discretionary commitments.
Done well, forecasting can prove to be incredibly accurate even in the absence of historical cash flow data. The only problem is that doing it well requires the two assets in shortest supply at startups: time and experience.
That’s why forecasting can often be frustrating. If the process is rushed it can result in incomplete or inaccurate forecasts. And when there’s little data about how much money a newly-established business brings in monthly, weekly, or yearly, it’s hard to look ahead with any degree of confidence. Add in an X-factor like a once-in-a-century global pandemic, and it’s clear why so many companies (startups and even mature companies too) have little idea what the future holds in terms of cash flow. But there’s an easy way to get the answer.
Outsourcing Cash Flow Management
Cash flow management is too important to risk doing less than perfectly. That’s why companies at all stages, and especially startups, outsource this huge obligation. Outsourced accountants have plenty of time, abundant expertise, and best-in-class technology they can use to forecast cash flow – and manage everything necessary to help you meet that forecast.
It’s understandable if a company struggles with cash flow forecasting – but it makes no sense if they don’t work to get better. Instead of making incremental improvements, master the art of forecasting now, at this pivotal moment in your company’s ascent. Contact Edward Thomas Associates to make your next forecast your best.