How to make the most of cash flow planning software

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? Knowing your cash flow and being able to plan for how it’ll change in the future is essential before you can plan any expansion, growth initiatives, or even recruitment efforts. Otherwise, you run the risk of having insufficient cash to settle bills and repay debts.

What is operating cash flow (and how is it calculated)?

Think of operating cash flow as the result of subtracting operating expenses from your revenue, revealing the actual amount of cash your business has. Positive cash flow is a sign of a business with healthy finances since your revenue exceeds your operating expenses. A large disparity between the two can signal high profitability (if your revenue exceeds expenses) or financial problems (when expenses exceed revenue).

This is the most basic way to calculate your operating cash flow, but it leaves out some important numbers, such as:

• Depreciation: For some business assets, you don’t just add the purchase price to your expenses. You have to calculate their depreciation, meaning the amount of value they lose over during the time you use them. This is especially important for businesses that use expensive equipment, vehicles, and similar assets.
  
• Change in working capital: This number covers the changes in your assets and liabilities between reporting periods. This number is included in operating cash flow calculations to account for these changes, which would otherwise go unnoticed.
• Cost of goods sold: At first brush, this seems like it should be included with operating expenses, but the two are very different. Operating expenses cover the costs needed to run the overall business—from employee salaries to renting the building—while costs of goods sold cover the expenses that go into producing the actual product you’re selling.
  
• Interest: Any interest paid on business debts needs to be accounted for in operating cash flow calculations and is usually considered separate from other expenses.
  
• Taxes: This expense needs to be deducted from your revenue as well to determine your operating cash flow, but separating it from other expenses can give you a better idea of which expenses can be reduced if you’re trying to improve profitability.

If you wanted to account for all these numbers when calculating operating cash flow—which is usually the case—your formula would look like this:

Operating Cash Flow = (Revenue - Operating Expenses) + Depreciation - Taxes - Change In Working Capital

While more complex, this formula will give you the best possible picture of your current cash situation and how profitable your business is. It can also give you important signals about how you can improve your cash flow.

Now that you understand how cash flow is calculated, let’s see why cash flow planning is essential for your organization.

Forecasting with cash flow planning software

Operating cash flow gives you valuable insights into your organization’s financial health and helps to surface potential problems. This gives leaders the ability to make better decisions. But calculating operating cash flow isn’t just essential for knowing your organization’s current financial health—it’s a crucial part of predicting future trends, too.

Cash flow planning is a type of forecasting that allows you to estimate your future operating cash flow, based on project financial events, like purchasing new inventory or adding a large new client. These forecasts use existing cash flow data, often from past planning sessions, and combine it with data on your organization’s present finances to project financial stability into future months, quarters, or years.

The accuracy of these forecasts depends on multiple factors, including the kind of data you have available, the tools you’re using, and your methodology. That’s why using cash flow planning software is so essential. This software automates many of the manual tasks that are part of this crucial process, like consolidating data from multiple sources.

Questions your cash flow planning software can help you answer

When you have the right tools, forecasting your cash flow can give you the data you need to answer some of the most important questions throughout your organization. Questions like:

• What is the organization’s anticipated revenue over the next quarter?
• How much cash will be available to spend in the coming months?
• What are some seasonal revenue changes that have affected the organization in the past? How can we predict them in the future?
• How does our upcoming cash flow affect our workforce planning initiatives?
• Does the business have enough cash to fund an expansion?
• What resources can be invested to support future business growth?

4 challenges solved by cash flow planning software

Many organizations use manual methods to plan their cash flow—with spreadsheets being especially popular. But while this is common, it can create a number of challenges that simply don’t exist when you use cash flow planning software.

1. Difficult project 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 without the right software. Smaller companies may lack the resources to dedicate time to tracking and calculating business cash flow.

2. 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. With cash flow planning software, these transactions are tracked and updated automatically.

3. Inaccurate forecasts

Projecting business cash flow is dependent on accurately projecting closed deals and revenue stability. Miscalculated projections can skew spending capability predictions. Most examples of cash flow planning software integrate natively with the sort of data sources the Office of CFO depends on, giving you the ability to create more accurate forecasts.

4. Constantly maintaining spreadsheets

Funds are likely being spent by your business daily. 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 regularly. Teams that use dedicated cash flow planning software don’t need to update forecasts, since that’s usually done automatically.

Why cash flow planning software is essential

The challenges of managing your business’s cash flow can seem overwhelming, especially if you plan to do it manually. This means cash flow planning software has become essential for organizations of all sizes. Here’s why:

• Cash flow planning software collects and tracks all necessary data and compiles it into accurate, automatically updated forecasts.
• Software streamlines the entire cash flow planning process, saving the Office of the CFO precious time that can be put towards other essential operations and responsibilities.
• Cash flow planning software automatically tracks every dollar coming in and out of your business without creating extra effort for the accounting team.
• Streamlining cash flow planning improves how you plan your business strategy, grants you a better understanding of your business metrics, and maximizes operational efficiency.

How to choose cash flow planning software

Cash flow planning software is essential for properly forecasting the resources your organization will have access to. However, not all solutions are created equal. Careful evaluation from the Office of the CFO can make the difference between quickly deploying a platform that suits your needs exactly and going through several sales cycles with multiple providers without finding the right tool.

We’ve written a full guide to finding the right cash flow forecast solution, but here are the features you need to evaluate before you make your choice:

• Audit logs: Unfortunately, every organization has to deal with an audit at some point or another. Before you add cash flow planning software to your stack, ensure it keeps detailed logs for this eventuality.
• Collaboration: The days of working in silos and passing data back and forth are long gone. The best platforms allow for dynamic, ongoing collaboration.
• Model-based data integration: Being able to integrate financial models into your forecasting is essential.
• Scalability: If the cash flow planning software you’re looking at is especially affordable but isn’t able to scale with your business’s needs, you’ll have to replace it eventually.
• Personnel planning: While this isn’t necessarily an essential part of every cash flow planning initiative, any cash flow planning software that also allows for personnel planning is a robust platform worth investigating.
• Accounts payable and receivable: Any platform you evaluate should be able to give you detailed tracking for these transactions.
• Trend analysis and reporting: Being able to pick up on trends and gauge their effect on your cash flow will make forecasting a breeze.
• Seasonality: If you’re in an industry where seasonality can have a huge influence on your cash flow, make sure the tool you choose can help you forecast for this.

These factors are just some of the aspects you must evaluate when considering a cash flow planning solution, which can make it a difficult process. But what if there was a solution that could do all this and more?

Look no further than Prophix. Watch the demo to learn just how much Prophix can do for your cash flow planning.