Cash Flow Forecasting & Budgeting
At Credo, we’ll help you set budgets, monitor and control spending against these benchmarks. We can also help you develop both short-term (monthly, quarterly) cash flow forecasts to help you manage daily cash, and long-term (annual, 3-5 year) cash flow forecasts to help you develop the necessary capital strategy to meet your business needs.
Forecasting
Forecasting is used to predict your future financial position over a given period of time.
In other words, a cash flow forecast (aka. cash flow projection) is about predicting your money needs in advance. It’s just your ‘most likely scenario’ – The more accurate data you have, and the more robust your current knowledge is, the more dynamic your forecasting will become.
Don’t worry too much if you can’t plan far ahead. Your cash flow forecast can change over time. As things change, or you get more exact estimates, you can update your plan.
Preparing a cash flow forecast has many advantages, like:
- Manage liquidity by identifying cash shortages and surpluses in advance
- Prepare for seasonal fluctuations
- Understand impacts of business changes (e.g., hiring new staff, expand into new market, investing in new products)
- Prove to lenders your ability to repay on time
- Spot opportunities to make improvements or reduce operating costs
Budgeting
Budgeting is used to control your business spending and to set base targets.
It’s generally done at the beginning of a period as an annual financial plan for the year ahead. It’s your chance to set targets for revenue and expenditure across each department, team or cost centre in the business.
Bottom Line
It is imperative that you constantly review your actual performance against budget. Variances need to be built into your cash flow forecasts so you can identify if you need extra fund or staff or stock. Imagine the scenario below:
- Will additional sales create a cash flow problem?
- Are you going to make a profit? And if so, is the projected profit a reasonable return?
- Do you need outside finance? If so, how much and what sort of finance? Equity or debt?
- Does the strategy look reasonable?
- What happens if your sales falls by 10%? What happens if your turnover sales by 10%?
Budgeting helps you remain profitable to make sure your company has a long-term future, while cash flow forecasting helps you make sure you have the right cash on hand to put your plans into action. They are both vital to set your business up for success
