Smart cash flow forecasting habit #1: add information as early as possible
For some companies, cash flow forecasting means reviewing a list of invoices they have already issued. That’s a good start but only allows you to understand what’s likely to happen during the next 3-4 weeks.
And if it looks like you’re about to run out of cash, it might be too late to avoid it. Even if you issue another invoice today, it will take ~4 weeks until the client pays it.
We have recently talked to 100+ professional services companies and asked how they do their cash flow forecasting. The most successful of them usually add planned transactions to the forecast as soon as they win a new client engagement. Or even earlier than that.
Read from this article what is cash flow forecasting.
At such an early phase it is difficult to know exact payment dates and even amounts. But successful companies don’t worry about it – they just use their best guess and later adjust it if needed. For example: we will sign the contract by 15 April, complete the work by 30 May and receive the money by 30 June.
Such cash flow forecasting process gives you a pretty good idea on what is likely to happen during the next 3-4 months, not just 3-4 weeks. Instead of just calculating “we need 52k of incoming payments during June” they can also add “…and it looks like 45k will come from these four clients, but we need to win more work so that we’d have the missing 7k as well”.
And that’s why cash flow forecasting is important. Forecasts should not just show the consequences of what you already did. Forecasts should also help you understand what you need to do and when.
For example, if you understand it is critically important to receive a certain payment exactly when forecasted, you will try even harder to make sure the work gets done and accepted on time.
You might object: it all sounds nice in theory, but how to keep track of all these dependencies without spending a ton of time on that?
Well, that’s the simple part. Just drop your spreadsheets and use TailwindApp instead. Adding a new transaction takes just 3-5 seconds and you will see your expected cash balance at any future date. Rescheduling any transaction by drag & drop is the easiest modelling that you will have seen! If you are one of the business owners that understands the importance of cash flow forecasting, you should also know that forecasting should and can be easy!
Try the demo to find out how Tailwind works.
Discover also other habits for smart cash flow forecasting: