Effective business forecasting involves taking a look into the future, but the future is not always simple to predict. There are economic trends and fluctuations to take into consideration, as well as industry specific factors that can take any business by surprise. However, careful cash flow forecasting really does help better manage the inherent risks of growing businesses.
On a more granular level, predicting sales, cash flow and expenses over the next twelve months can be challenging. It is often hard to accurately forecast the behavior of your customers, not only from a sales point of view, but also from reliability when it comes to paying invoices. So what is the best way to plan? Identify all the variables to the best of your ability, from your sales cycle to customer satisfaction. Be aware of your competition and of any emerging competition that may affect your future sales. Keeping abreast of market trends is also helpful.
Accurate anticipation of your cash flow needs means analyzing sales as well as payment history. Do you track when bills are due compared to when payments are received? What sort of credit do you offer your customers, and do they pay on time? If your customers pay late do you have a contingency plan, or will you experience a cash flow crunch?
A huge benefit of accurate cash flow forecasting is that it gives you the information your business needs to decide what types of financing you may require. The options vary from credit cards, lines of credit, business loans, invoice factoring, and many other new alternative financing possibilities. It helps to understand the pros and cons of each funding opportunity, and whether your company will qualify or not. When forecasting, there are a few pointers to bear in mind:
- Make sure your projections match performance. Any discrepancy in figures will make it harder to obtain certain types of financing.
- Be realistic about your cost projections; include all relevant costs especially when it comes to personnel.
- Understand your competition and make sure your forecast fits with the overall forecast of your industry.
- Evaluate the necessary loan requirements for your chosen form of financing to establish the likelihood of qualifying.
Whatever type of funding fits your business model, it is important to keep a healthy cash flow cushion. Many financing options involve copious amounts of paperwork and rigid qualification requirements. One form of financing that does not rely heavily on a strong business plan, but on a healthy amount of accounts receivable is invoice factoring. It is also a great option if bad credit or lack of credit history is an issue. Factoring your invoices offers a financial solution that can answer the cash flow dilemma. However, careful business forecasting helps to monitor and contain costs, as well as effectively manage growth so that profit margins remain healthy. This can often make the difference between success and failure.