Cash flow can be the reoccurring nightmare that keeps business owners awake at night.
One of the common issues for many businesses is anticipating the amount of cash flowing in and out, which can be hard to predict, especially for smaller businesses with fewer in-house resources overseeing cash management.
In our article, we'll take an in-depth look into cash flow forecasting, why it is crucial, how to forecast cash flow, and how a cash flow forecasting software compares against a plain old spreadsheet so you'll better understand how effective forecasting can remove uncertainty within your business.
Cash flow forecasting (also called cash flow projection) is a financial planning concept that estimates your future cash positioning. It does this by measuring the cash that flows in and out of a business based on business performance over a specific period.
Cash flow forecasting is a handy tool for businesses looking to plan their finances better. Forecasting can provide insights to better manage your activities based on your uses of cash. Importantly, you can also leverage these insights to create a contingency plan that'll help you be more prepared for when you have a change of circumstances in future.
Although cash flow forecasting acts as an estimation, it plays a crucial role as your guide for cash flow position and liquidity.
Cash flow forecasting has many benefits for businesses, including:
So now you've read all about cash flow forecasts, it's time to dive deep into three-way forecasting, which is how we structure our forecasting tool at Fathom.
Three-way forecasting, also known as a three-statement model, is essentially a combination of the following reports:
A three-way projection is vital to the future planning of your business, as you'll be able to use different scenarios to create a more comprehensive understanding of what may happen to your business over the coming few years. Your projection will give you a closer lens on what works well and tweak your strategy as needed.
Learn how to start with Fathom's forecasting tool in our Introduction to Forecasting video series.
A cash flow forecast could be one of the most essential pieces in your business plan, as it can predict your future monetary needs over a specific period.
The primary objectives of cash flow projections include:
Large and small business owners are alike in one way: they both want to know what's around the corner.
With a cash forecast, you can identify future opportunities, plan your growth trajectory, and look out for potential pitfalls and dangers.
The forecasting process lets you know the difference between your total cash flow and profits and develop steps to examine both elements closely.
A cash flow analysis can encourage you to have greater control over your spending so you can be more active in managing your large or small business finances effectively and be more accountable for how much cash you're spending.
With Fathom’s one-of-a-kind cash flow forecasting software your business will have one platform with infinite possibilities. Your business will be equipped with powerful forecasting that seamlessly integrates with Fathom’s market-leading reporting tools.
The important parts of a cash flow will typically include the following to build up an accurate picture of your financial health:
Cash flow forecasting starts with choosing from one of two different methods:
Fathom uses the indirect cash forecasting method to help you with long-term planning (up to three years in the future). If we use Fathom's cash flow forecasting software as an example, there are three ways you can get started:
You can learn more about forecasting through Fathom by watching our Forecasting 101 video series.
In our cash flow forecast example video below, a SaaS company client is looking at hiring someone for their sales team.
The sample cash flow projections in the video help the company determine the best time to hire and consider its objectives.
When we take a step back and look at cash flow forecasting, the pros outweigh the cons.
However, here are some cash flow forecasting issues that businesses should be aware of:
In this section, we’ll weigh the advantages and drawbacks of creating a cash flow projection in a spreadsheet, using software such as Excel.
In this section, we’ll weigh the advantages and drawbacks of creating a cash flow projection in a spreadsheet, using software such as Excel.
As you can see, building a cash flow projection in a spreadsheet comes with many inherent challenges that will hinder rather than help your business.
Fathom’s cash flow forecasting software is better than Excel. Goodbye fiddly spreadsheets. It’s time for a dynamic tool to provide you with a living forecast that updates when your financials do, pulling actual cash flow data directly from your chosen accounting software.
As you can see, cash flow forecasting can be a complicated and painful process that can be simplified with a powerful tool for giving businesses clear, coherent, actionable advice to guide their future business transactions.
If you want to learn more about the features, functionality and benefits of cash flow forecasting in Fathom, we have more information through our help centre.
Meanwhile, the Fathom blog have a host of tutorial webinars and testimonials that you can explore.
At Fathom, we decided to radically rethink what a forecast can be and what it can do.
Instead of a complicated static document of numbers, we've built a cash flow forecasting tool that is fast and dynamic and brings financials, visuals and people together with a click of a button or the drag of a mouse.
Cash flow forecasting is standard when you subscribe monthly to Fathom. If you're not yet a Fathom user, remember you can explore the capabilities of cash flow forecasting software when you start a free 14-day trial today.
