How to Calculate and Forecast Your Business Cash Flow in Uncertain Times

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Do you know how much money is in your business accounts from one day to the next? Can you predict how much cash your business will have on hand next quarter? What about next year? Managing your company’s cash can feel like an overwhelming task. And with unexpected changes to your revenue and costs as a result of the pandemic, it’s no small task to revisit your prior cash flow expectations. Improper management of business operating cash flow can lead to major issues with your finances. Without an accurate cash flow forecast, you run the risk of having insufficient funds to settle bills and repay debts. So, it’s essential that you understand what operating cash flow is and what it can tell you about your business. With funds coming in from so many sources, business expenses popping up constantly, and fluctuations in sales numbers, it can seem impossible to keep track of exactly how much cash your business has at all times. Business operating cash flow is amount of cash generated from your company’s regular business operations. This is an important calculation to monitor because it can indicate whether your business should cut back on operations, maintain your course, or pursue growth initiatives. Let’s look at how to calculate your business cash flow and what insights you can draw from this metric.

How to Calculate Your Business Operating Cash Flow

You can think of operating cash flow as your operating expenses subtracted from you net income, revealing the amount of cash your business actually has. The simplest explainer for healthy operating cash flow is that your revenue should exceed your operating expenses. When the disparity between the two numbers is large, you have enough cash and your business is operating profitability. While this explanation is the most direct, there are other financial factors that much be taken into account, too. The formula below is another way of explaining operating cash flow. Net Income + Non-Cash Expenses – Increase in Working Capital = Operating Cash Flow Before you can determine operating cash flow, you need to calculate the different components of the formula:
  • Net Income - Net income is your expenses deducted from your revenue.
  • Non-Cash Expenses - This can include depreciation, stock bestowed on your employees, deferred tax payments, or any other non-cash items
  • Changes in Working Capital - Increases in accounts receivable and inventory are deducted from net income and non-cash expenses. Revenue generators like increases in accounts payable, accrued expenses, or deferred revenue are added to your net income and non-cash expenses.

Forecasting your Business Cash Flow

What’s the point of calculating your operating cash flow in the first place? This is more than just another task on your to-do list. Operating cash flow can provide a number of valuable insights for your financial standing, allowing you to make the most informed decisions for your business. Because these numbers are changing so frequently, your operating cash flow can look different from one day to the next. A cash flow forecast allows you to estimate your future operating cash flow, based on projected financial events, like purchasing new inventory or adding a new client. A cash flow forecast uses data from past cash flows and your current finances to project your financial stability in upcoming months, quarters, or years. While a forecast may not be 100% accurate due to unforeseen factors, with enough data, you can predict big-picture trends in your business. Here are some key questions about your business that forecasting your operating cash flow can help you answer:
  • How much money do you have available to spend based on anticipated revenue?
  • Are there seasonal revenue increases or decreases that could impact your spending ability?
  • Will you need to add to or diminish your labor force in the future?
  • Is your business ready to grow?
  • If you are pursuing growth initiatives, what resources can you afford to invest in to support growth efforts?
It’s estimated that 82% of businesses fail due to poor cash management. However, with insights like these, you can determine the proper course for your business and ensure you’re making informed decisions about how your cash is used.

Ongoing Management of Your Operating Cash Flow and Cash Flow Forecast

Calculating your operating cash flow and drafting a forecast are only the first steps. You have to invest time and effort into continually managing your operating cash flow and keeping your forecast up to date. While these are essential steps, they still come with some challenges.

4 Common Challenges with Cash Flow Management

  • Difficulty Projecting Expenses. Both large and small companies may have difficulty projecting expenses. For large companies, accounting teams may struggle to compile all the metrics required to calculate operating cash flow. Smaller companies may lack the resources to dedicate time to tracking and calculating business cash flow.
  • Unexpected Transactions. Unexpected expenses turn up all the time. Perhaps you were on the verge of closing a deal when the sale fell through. Maybe a major piece of equipment is unexpectedly damaged and needs repair. Tracking these unexpected events in all departments can be time consuming and challenging.
  • Inaccurate Forecasts. Projecting business cash flow is dependent on accurately projecting closed deals and revenue stability. Miscalculated projections can skew spend capability predictions.
  • Constantly Maintaining a Spreadsheet. Funds are likely being spent by your business on a daily basis. And, for accurate cash flow forecasting, you have to track every transaction. This can be a daunting, tedious, and time-consuming task, which is why accounting teams often leave it undone or fail to update the forecast on a regular basis.
Many companies struggle to accurately forecast business cash flow, especially when manually doing so via Excel. However, there’s another option that can make your cash flow projections more accurate and take the responsibility off your plate: automation.

Automating Your Business Cash Flow Management

If you’re overwhelmed at the thought of managing your own business cash flow, don’t worry. Software providers have developed accounting solutions to automate cash flow management, making the process easier for companies of any size. These solutions collect and track all applicable data points and compile that data into accurate and automatically updated forecasts. Solutions like Prophix, for example, streamline the entire cash flow management process, allowing you to return your attention to regular business operations and job responsibilities. Each cent that comes in or out of your business can be automatically tracked using this solution, with little effort from your accounting teams. Automating your operating cash flow management and forecasting can improve how you plan for your business, understand your business metrics, and maximize operational efficiency. However, it’s crucial that you find the right solution to adopt. As you evaluate different solutions, be sure to consider how each option will make operating cash flow management easier. With better management and more accurate cash flow forecasts, your business can make informed decisions that will greatly improve your bottom line. Want to learn more about operating cash flow? Download this comprehensive guide now.
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