How Can Cash Flow Forecast Help Your Startup?

How Can Cash Flow Forecast Help Your Startup?

Financial management for startups can get really out of hand if processes are not organized from the get-go. It is always important to be aware of the financial standing of your startup at all times and anticipate all possible risks that your venture may encounter in the future. Especially during the first few months, it is common for new businesses to tackle cash flow problems. In such cases, an efficient cash flow forecast would help you manage your finances better.

What Is A Cash Flow Forecast?

In simple terms, a cash flow forecast is an estimate of your company’s financial position with regards to cash flow in the future. Based on the ongoing inflow and outflow of cash, a cash flow forecast allows you to look out for potential gains, losses, and risks for your startup. A cash flow forecast shows you the likelihood of money coming in and going out of your treasury over a specific period of time.

An effective cash flow forecast would take into consideration every little detail about the income, expenditure, sales, loans, interests, and everything that leads to an increase or decrease in your company’s cash reserves. The motive of a cash flow forecast is to estimate the financial future of your business based on the transactions carried out in the past. It is an important tool for planning the budget of startups and making business decisions that matter.

What Should You Include In A Cash Flow Forecast?

Ideally, there are three major components that go into making a cash flow forecast – cash balance, payments, and receipts.

Cash Balance

Your cash balance shows the cash available with your startup at any given point in time. It is the balance remaining in your company’s account after income is earned and expenses are incurred over a specific period of time.

While preparing your cash flow forecast, the opening balance would be the company’s bank balance when you started making the forecast. As time passes, the closing cash balance of a specific period would become the opening balance of the period succeeding it.

Receipts

In order to make an efficient cash flow forecast, it is important to add an estimate of receipts for the period covered by your cash flow. Make sure you look at the sales and cash flow trends of previous years while anticipating your receipts.

Payments

Once you have anticipated receipts, you are required to estimate the payments your startup would incur for the period covered by your cash flow. Make sure you include both fixed and variable costs in this section to get an accurate forecast. If you are expecting a future capital expenditure, add the same to your cash flow forecast to get a complete picture of your business finances.

Why Is Cash Flow Forecast Important For Your Startup?

Here are some of the most important reasons why it is important to maintain a cash flow forecast for your startup:

Being Prepared For Cash Shortages

Startups often struggle with cash shortages due to limited resources. When you are caught unaware, it is difficult to fill the gaps in your cash flow effectively. A cash flow forecast lets you know if you are likely to face cash shortages in the future. In such cases, you can equip yourself with the right resources to ensure that your business operations do not suffer if you face a cash crunch in the future.

Whether it involves cutting down your operating costs, delaying investments, or borrowing the right amount of funds, cash flow forecasting allows you to find a way of tackling issues you are likely to encounter in the future.

Keeping Track Of Late Payments

If your cash flow forecast shows a trend of late payments, you can identify the debtors who have been consistent in delaying payments. This helps you modify your financial relations with specific debtors and alter your approach to credit control, keeping your cash flow even and uninterrupted.

Tracking Your Expenses

Along with keeping a track of late payments, a cash flow forecast helps you track all your expenses for a specific period of time. When you prepare a cash flow forecast, you can identify patterns in funds getting withdrawn from your startup’s treasury. This helps you ascertain the fixed and variable costs being incurred on a regular basis. If the fixed expenses incurred by your company exceed the ideal limit, your cash flow forecast would allow you to make amends before it is too late.

Analyzing Future Projects

When you have a cash flow forecast at your disposal, you can make valid tentative assessments about future projects. This helps you create hypothetical scenarios for your business and ascertain the impact of the same. For example, if you are willing to diversify your startup and open a new branch in a different city, your cash flow forecast would help you decide if your finances would allow you to take this step. As the forecast makes use of your historical data, it prevents you from making far-fetched estimations.

Moreover, cash flow forecasting would prompt you in making suitable arrangements if you are willing to take up specific projects in the future and your financial position does not allow the same.

Tapping The Right Opportunities

Once you have your startup up and running, you will come across a plethora of opportunities that would help your business grow. However, it is important to choose to tap into the opportunities that are best suited for your business. Especially if your resources are limited, an effective cash flow forecast helps you compare different opportunities and provide you with a clear sense of direction for going with the best option.

The Final Word

These were some of the most noteworthy ways in which cash flow forecast can help your startup. Setting up and running a startup is filled with financial challenges and a holistic cash flow forecast keeps you aware of the current financial position of your business and the risks/rewards you are heading for in the days to come.