Then Optimize Your Accounting Practices
When it comes to running a business, the owner is most likely constantly tracking, monitoring, projecting and anticipating data, especially with regard to funding and cash flow.
For any organization, the financial status and flow of incoming and outgoing funds should be among the most important metrics used for accurate forecasting. Most thriving businesses are always aware of their financial situation.
Forecasting cash flow and capital funding can be two of the most difficult metrics to manage. Try as we might, it is still impossible to predict the future. But, there are best practices that make the process easier to manage. These include:
A cash flow forecast isn’t the same as a budget. A budget details the income and expenses a business owner can expect each month. Forecasting involves the timing of incoming and outgoing cash. For many small businesses, the cash flow forecast can actually be a significantly more important and useful tool.
For planning purposes, business owners should consider a rolling six-week forecast that provides ample time to react if a significant problem is discovered, but is not too far in advance that predictions become little more than blind guesses. For example, if the terms are net 30 days for customer A, but payment is typically made in 45 days, this would be the basis for that forecast. Under this scenario, the Aug. 1 invoice becomes Sept. 15 collections.
As previously stated, it’s impossible to predict the future. Planning ahead, however, does make for fewer surprises and helps smooth out potential bumps in the road.
Communicate and Discuss
The better ideas, plans and forecasts are communicated, the more likely it is that they will run smoothly. If there is a capital funding forecast plan, be sure it is shared with other relevant employees who can provide input or spot inconsistencies.
The forecast also can be shared electronically or printed so employees know what receivables need to be collected and what bills can be paid to make payroll. Open and frequent communication with everyone involved in the cash flow process will also make forecasting easier to predict.
When running a business, it’s best to automate as many processes and procedures as possible, which will help make operations run more smoothly and efficiently. The automation measures should include as much of the entire cash flow process as possible. One way to accomplish this is to incorporate software that synchronizes with desktop cash flow and funding software to automatically calculate previous funds and help determine future payments.
With automation software, a business owner can rely on data that has already been gathered, and does not have to worry about compiling the information for an accurate forecast each time. Additionally, utilizing this kind of program enables the user to easily add other sources or uses of funds without disrupting the entire process. The purpose is to create a comprehensive drag-and-drop forecast that indicates whether or not there is potential for a funding problem.
Using a dashboard each month to review actual results against forecasts and noting any significant variance can help businesses effectively track cash flow. The cash flow forecast should be updated every week when new information is introduced, such as a new investor or a big sale that was not in the original forecast.
Don’t expect a perfect cash flow budget or capital funding forecast every time, if at all. When trying to predict the future, there are often times of uncertainty. But the closer an owner can get, the more effective and profitable the business will be in the long-run.
Stephen King is president and CEO for GrowthForce, an outsourced bookkeeping and controller services company. Through its alliance with Insperity, GrowthForce offers InsperityTM RevealTM, a financial software solution that integrates with QuickBooks to offer real-time, web-based access to financial information.