82% of small businesses fail due to poor cash flow management. Many of these businesses didn’t realize they had a cash flow problem until it was much too late to fix it.
So, how can you mitigate this issue with your business? One way is to establish a cash flow estimation process. By creating a cash flow forecast regularly, you can identify and mitigate potential issues.
Keep reading to learn what it is and how to put it into place in your organization.
What Is Cash Flow Estimation?
Cash flow estimation is a prediction of how much inflow and outflow of cash a business will have at a given time. Conducting regular forecasts can help your business understand when to make investments or get more funding.
Businesses can assess cash flow for the entire organization or break it down. Many companies estimate cash flows for special projects. Most do this monthly, quarterly, or on an annual basis.
There are several types of cash flow:
- Operating
- Investing
- Financing
- Net
The calculations for each of these vary slightly.
How to Estimate Cash Flow
It can get complicated to estimate cash flow. Depreciation of assets or compound interest can make calculations more intricate. The basic formula is:
Cash on hand + projected income – projected expenses = cash flow at a specific time
There are a lot of ways to make cash flow estimation simpler. Many accounting software has this option, or you can choose a tool. You can learn more about cash flow forecasting tools here.
Benefits of Cash Flow Forecasts
Calculating cash flow forecasts regularly can help your business grow. When you create these documents, you’ll have a clear view of:
- Expenses
- Shortages
- Surpluses
- Income
When done accurately, you can quickly assess what changes could do to impact your business operations. For example, you could add in the costs associated with a new hire to determine if it’s a viable option.
Potential Cash Flow Problems
You may be wondering what your company could be facing if you don’t do a cash flow estimation. Well, there are a few different situations that could arise, such as:
- Late payments
- Strained relationships
- Lower credit ratings
- Increased debt from late payment fees
- Missed opportunities
- Business closure
- Lack of funds to pay employees
- Lack of funds in emergencies
As you can see, the potential issues could be detrimental to your organization. Holding too many accounts you owe money to is not only stressful but also gives your business a bad reputation. Plus, the more debt you have, the lower profits.
Cash flow estimates can help you effectively manage your business.
Read More Interesting Articles
We hope you learned more about cash flow estimation after this article. Now that you know more about estimating cash flow, you can make important changes in your business.
Do you want to read more interesting articles? Check out our blog for business and technology topics.
