Money Matters

FP&A 101: cash flow forecast for new business

Cash flow—it’s the lifeblood of any business, especially new ones.

When managed effectively, it can be a source of stability and a catalyst to drive future investment and growth. Conversely, uneven cash flow can put significant stress on your business and make it extremely difficult to develop and execute strategic plans.

For new businesses, healthy cash flow is especially critical—and particularly challenging. Case in point: A survey conducted this year by Consero Group found that 75% of startup founders reported cash flow as their top challenge. Their fears are founded. According to CB Insights’ analysis of more than 100 startup failures, running out of cash is the second-most-prevalent reason startups fail.

Cash flow forecast for new business: first things first

Effective cash flow represents a twofold challenge. First, make sure there is adequate cash on hand to promptly make payroll and pay vendors, make planned purchases of equipment and supplies, and have enough reserves to handle unexpected costs. It’s essential to establish clear policies and discipline around accounts payables to ensure vendors are paying promptly.

Equally important is keeping close track of the money going out the door—something that can be overlooked by a young company that’s hyper-focused on generating revenues. Every business should have a rigorous process to track expenses on a monthly basis.

Second, and more challenging, is establishing the capabilities to effectively forecast and plan for future cash flow. Again, this can be daunting for startups and early-stage companies that don’t have the benefit of a long track record that might reveal seasonal cash flow fluctuations or other industry-specific trends that impact cash flow projections.

Highly ranked by CFOs

Yet, while newer companies may be most vulnerable, the challenges of forecasting future cash flow persist in businesses of all sizes and in all stages of maturity. For example, a study by Proviviti Consulting recently cited in CFO magazine found “cash forecasting represents one of the highest-ranked priorities” in their surveys of CFOs.

The report further notes that to get a better grasp on forecasting, CFOs are reaching out to operational units to “to equip business partners throughout the organization with more precise and real-time information on performance, cash positions, and profitability drivers to strengthen strategic decision-making.”

Indeed, the first step toward better cash flow forecasting is making sure you have the tools and technology capable of identifying and integrating the right data and information that can then generate actionable insights and inform projections. That’s tough to do if you’re relying on manual cash flow forecasting—which is largely dependent on spreadsheets. Not only is the manual process time-consuming and error prone, but it lacks the capabilities needed to get a robust view of likely future revenues and spending.

Modern technology improves forecasting

A more effective approach is predictive cash flow forecasting that leverages technology and cloud-based software solutions that can provide greater visibility into the business and establishes a single source of truth to ensure there are a consistent set of data and numbers that everyone in the organization relies on.

Predictive forecasting capabilities allow you access to accurate, automated cash flow forecasting across the entire business, at the click of a button. Specifically, look for cloud-based solutions that have the capabilities to:

Move you beyond Excel: Cash flow projections that are too dependent on Excel can mire finance in fixing broken calculations and double-checking data. Look for solutions that can take your spreadsheets to the next level by centralizing actuals, plans, forecasts, calculations, and cell notes. Establishing a single source of truth fuels trust and accountability and ensures that your planning processes scale with your business.

Offer a full view of the future: The best solutions can draw from many data sources to generate models of projected revenues and expenses related to sales, capital investments, workforce costs, and other information. The result is a comprehensive picture of what lies ahead so you can better manage and forecast cash flow accordingly.

Make real-time adjustments: Unlike static spreadsheets, planning and forecasting technology can create rolling forecasts that reflect changing economic industry, or company conditions. You can have the latest actuals, assumptions, and modules always at hand—and truly responsive calculations and reports, allowing you to proactively manage change, model outcomes, and course-correct at the pace your business demands.

There is no doubt that cash flow will always be the lifeblood of your business, whether you’re just getting off the ground or building on an established track record. Being able to effectively forecastcash flow goes beyond simply assuring your company will be healthy six months or a year from now. Rather, it can provide a competitive edge that allows you to make timely investments, be more strategic about making payments, focus your resources to drive better results, and outmaneuver your competitors.