Some strategies can help entrepreneurs accurately plan and predict their business growth and spending, while also compensating for unknown factors and mistakes.
One powerful strategy is cash forecasting. According to a definition in an Oracle article entitled About Cash Forecasting, “Cash forecasting is a planning tool that helps you anticipate the flow of cash in and out of your business, allowing you to project your cash needs and evaluate your company’s liquidity position.”
Suitable for Business of All Sizes
Cash forecasting is a tool that can be used effectively by an entrepreneur or a corporate treasurer. The size of the business does not matter when trying to anticipate the business level you hope to achieve from one month to the next.
An Art and Science
Cash forecasting is the art and science of building a cash plan to manage your work, your team, your assets, and your resources by taking into account past results, current circumstances, and future probabilities. Cash forecasting is both an art and a science, because it takes ingenuity to expect the unexpected, but also the statistical expertise to combine past performance data and current information to get a good handle on probabilities.
Important vs. Urgent
Another benefit of cash forecasting is that it allows you more time to do what’s important rather than only focus on what’s urgent. You can plan ahead instead of reacting to daily events.
3 Core Ideas
Here are 3 core ideas to begin cash forecasting:
1. Determine the basis for your forecasts.
To clarify your assumptions, you have to figure out the average number of customers gained and lost throughout the year. You also have to work out the average number of sales per customer. Also, determine the cost of your customer acquisition. Notice if certain months are more profitable than others. In retail, for example, customers increase before big holidays and decrease after them as a natural part of the seasonal cycle.
2. Make some reasonable assumptions.
Sometimes, it’s possible to anticipate buying cycles which will help you determine inventory costs and revenue generation. To figure this out, you have to look at industry trends, your financial resources, possible sales barriers, and your current line of products. For instance, if you’re in the mobile phones business, you could take advantage of the current popularity for wellness devices. Taking action on this industry trend, might involve spending your money on improving your line of products by adding fitness trackers. One possible sales barrier might be that people may be reluctant to spend money on something they don’t understand. Consequently, your best strategy is not only to add fitness trackers to your inventory but also to spend money to educate your sales team on why fitness trackers are beneficial for someone looking to get back in shape. Moreover, it’s reasonable to anticipate that these devices will probably sell well at the end of the year when people are making New Year’s resolutions; so, it may be best to stock up then. When making your reasonable assumptions, do market research to put some numbers on your forecasts, as well as outline a list of reasons for making your forecasts. This will help you next year when you are reviewing what forecasts worked out for you.
3. Avoid cognitive biases.
When forecasting, it’s easy enough to have blind spots known as cognitive biases. For instance, accountants have a cognitive bias toward pessimism while salespeople have one for overoptimism. It’s just an aspect of their natures and profession. The way to spot cognitive biases and avoid the pitfalls of unrealistic financial projections is through retrospection. Instead of trying to figure out the levels of sales you need to make for your business to be viable, look at what did last year. This retrospection will allow you to identify what worked and pinpoint what did not work. You will know when to play defense and when to play offense.
Why Link Cash Forecasting with Sales Forecasting?
Think of cash forecasting as collecting data and sales forecasting as applying the data to promote business growth. You can’t do one without the other. Cash forecasting and sales forecasting work like team players. Cash data will give you an idea of some reasonable cash management objectives while sales data will give you a clear goal in mind so that you can start to create steps to move your business plan forward. A holistic plan of action for an entrepreneur is understanding both your operating costs and what progressive steps you need to take to achieve your revenue goal? A caveat: although both cash forecasting and sales forecasting work when applied, we all tend to put off things we don’t like doing, and both types of forecasting are often get thrown into a “do it late” file folder.
