In the most basic sense cash flow is simply the amount of money that flows into and out of a business. And the more of it, the merrier. So cash flow forecasting involves managing these in and outflows while looking into the future and planning.
If you're interested in getting into the nitty gritty check out our definitive guide to cash flow forecasting. For now though we are going to dive into short vs long-term forecasting.
What is short-term cash flow forecasting?
A short-term cash flow forecast can be defined as anything from a one-week forecast to 30 days, 90 days, or even a year into the future. Looking at the immediate future gives you more confidence to make decisions about your business.
Short term forecasts are a great, but underused tool, for managing cash. A long-term cash flow forecast typically looks at the cash balance at the end of each quarter or year, and can overlook cash swings within a month or week. A short-term cash flow forecast looks in more detail, usually every day, for the next three months.
Why create short-term cash forecasts?
Cash flow forecasting gives you more detail and insight on when and how you will be paying and receiving payments.
At a high level it alerts you to any cash shortfalls, so you can take early remedial action. Or if you see you are going to have a cash surplus, you can confidently put it to better use in things like interest-bearing accounts, or invest it to grow your business.
It also helps answer more operational questions like:
- Can my team afford to take on this big project?
- Can we hire a new staff member this quarter?
- What happens if our biggest client pays late this month?
- Is it possible for us to delay a payment?
While cash flow forecasting might initially sound purely like a financial function, it ultimately helps you make better, more confident business decisions.
Which businesses would benefit from short-term cash flow forecasting?
While all businesses can benefit from short-term cash flow forecasting, some benefit more than others. Typically, smaller businesses in industries with ‘lumpy’ or inconsistent payments will benefit the most. Because these businesses lack consistent inflows and outflows they need to spend more time considering when, and how, they receive and give payments.
Example industries include:
- Tourism & Hospitality
Ultimately, short term cash forecasting is critical for businesses where revenues and/or expenses are not steady and predictable - for example: new businesses, growing businesses, businesses changing their operations, and business in certain industries.
It's also a great tool for businesses that are paying off debt, and/or looking for credit, getting ready to be acquired, or evaluating a variety of scenarios like expanding, increasing owner draws, and hiring
Short-term forecasting tools
“The ultimate cash flow management & forecasting service letting you instantly know your cash flow today and tomorrow."
Cashflow tool offer a Lite version of the software for free which can forecast up to 4-weeks and two paid tiers with the ability to forecast 6 months into the future and additional features.
“Cash Flow Frog is a simple yet powerful cash flow management, forecasting, and scenario planning tool.”
Cashflow frog offers a standard version with the ability to create 1 year forecasts, and a Pro version with more features and 3 year forecasting.
Built for small businesses with inconsistent cash flow. Helm allows you to make confident business decisions with easy cash planning
Helm provides you with the numbers you need in real-time so you can make quick and confident business decisions, without spending hours creating budgets and forecasts in spreadsheets.
Helm comes with 1 month, 3 month, 6month and 1 year forecasting and integrates with QuickBooks Online, Xero, and Sage.
What is long-term cash flow forecasting?
Businesses often neglect long-term cash flow forecasting however, using it, you can make better and more well-informed decisions in your business.
As we discussed, short-term is up to 12 months, typically in monthly or even weekly increments. On the other hand, medium and long-term forecasting looks 2 to 5+ years out, and is typically in quarterly or yearly increments.
When creating a long-term forecast a good starting point is to create a budget for the long-term based on past financial statements. Then, taking them as a base, you can add expected sales, costs of future projects, and markets you plan to enter into your budget.
Why create long-term cash forecasts?
Fundamentally, long-term budgeting is putting your strategic goals into numbers. It’s a good prediction of what cash inflows and outflows your business will be experiencing in the future.
Periodically compare actual results to what you forecasted earlier, and adjust your budget accordingly for the future. Reviewing your budget will reveal areas of your business that are most and least profitable. This gives you an indication of which projects to drop and which need more attention and resources.
Which businesses would benefit from long-term forecasting?
A variety of businesses can benefit from long-term forecasting. Especially those with large, long-term projects or those with large inflows or outflows they expect to happen outside of the next twelve months.
Long-term forecasting tools
“The growth focused planning solution.”
"Finally a purpose built all-in-one FP&A solution, unlocked by the power of driver based financial modeling”
“All-in-one reporting, analysis & forecasting.”
“Fathom combines insightful reporting, fast cash flow forecasting and actionable financial insights into one refreshingly easy business management solution.”
“True cashflow forecasting and business modelling.”
“Castaway is a comprehensive and intelligent business modelling and cashflow forecasting tool. Castaway’s powerful business modelling, scenario planning, dashboarding and reporting retains the integrity of your forecasts with double-entry accounting. Castaway helps you tell the story of your business.”
Cash Flow Forecasting
Today we’ve seen the benefits of short and long-term forecasting and how they can help your business. If your interested in seeing how Helm could help you forecast, manage your cash and make better business decisions book a meeting with one of our advisors, or start a free 14-day trial.
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