cash flow forecasts

5 min

How to go beyond simple invoice management and build better cash flow forecasts

To manage cash flow, you need accurate cash flow forecasts. With forewarning of shortfalls, you can take steps to adjust your course. Libeo gives you real-time forecasts in one click.

Glen Foster

Glen FOSTER • Libeo

Published on | Updated on

Why Cash flow forecasting is essential for businesses

Prioritising cash flow is always important. We even recently wrote a blog about it. But in this article, we’re going to dive deeper into organising your finances as a small business – into the land of cash flow forecasts.

Put simply, cash flow forecasting is a method of estimating the amount of ready money coming in to and out of your business over any given month, year or other relevant period.

The chief advantage of a cash flow forecast is to give your business forewarning of any shortage. Employing corrective measures to head off negative cash flow – for example, preemptive changes to your payment strategies and collection terms, selling assets or arranging loans – can go a long way toward softening the financial blow.  

It is essential to optimise your cash flow. The aim is to balance your finances, maximise the amount of money in your bank account and reduce reliance on credit.

Optimising cash flow can have several meanings. It might refer to increasing capital, gaining extra resources through a bank loan, negotiating new payment terms with suppliers or performing a cash flow analysis.

improving cash positions: the challenge of managing DSO and DPO

According to PYMNTS, data shows that roughly 60% of CFOs are investing in opportunities to improve their cash positions to manage Days Sales Outstanding (DSOs) and days Payable Outstanding (DPOs) most efficiently. As Robert Johnson, senior vice president of payments at Corcentric, told PYMNTS: “Better accounts payable (AP) and AR workflows are critical,” , adding that “as rudimentary as that might sound, it’s key to make sure that payments are being processed as quickly as possible.”

Faster payments and AP and AR automation not only streamline payment operations but also help buyers maximise early payment discount opportunities. That way cash can be redeployed into the business for more strategic opportunities.


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How to build a cash flow forecast

Step 1: choose a cashflow time period

First of all, pick the time period you intend to forecast. It can be as short as a few weeks or as long as a few months. Most importantly, it must cover your whole cash flow cycle – the length of time it takes for cash that has left your business to flow back in.

By their very nature, cash forecasts are subject to circumstantial change. It is good policy to review your projections regularly using the most up to minute data. By doing so, you will secure a more accurate estimate and be able to make better management decisions.

Step 2: add up the income

Next, total up all the cash coming into your business for each week or month of the forecast period. You need weekly or monthly amounts for each type of income.

This total is, of course, an estimate, but you can use sales from previous years as a guide. If yours is a new business, make projections based on a realistic figure. It’s best to plan for the worst-case and be pleasantly surprised than to anticipate the best and struggle for funds.

As this is a determination of what cash will be available to you, enter the dates when you anticipate the cash will clear your account, not the payment date.

There may be income separate from sales. Any grants, investments or other fees should be recorded, with individual totals for each income type in any week/month.

The overall total gives you your net income.

Step 3: add up your business expenditure 

Now, follow the same procedure for your outgoings, being sure to total up every anticipated expenditure.

Once again, maintain individual totals by expenditure type for each week/month. The overall amount is your net outgoings.

Step 4: establishing your cash flow

Finally, we get to the dramatic part. Is your cash flow forecast positive or negative?

You can establish this for the whole period, or for each week/month, by subtracting net outgoings from net income. A positive figure forecasts that you will have sufficient cash flow to cover your business’s needs. A negative figure indicates that you are likely to face negative cash flow and have insufficient funds to meet your expenses.

But like we say above, you can use this information to take preventative action by minimising expenses to maximise funds.

How to integrate Xero with Libeo?

How can I do all of this in one click?

Many business owners still labour over a spreadsheet and do both their invoice management and cash flow forecasts manually. But by doing so they risk overlooking an expense or misremembering a payment date. It’s time to embrace easier and near-instant options.

It is now possible, with a single click, to have real-time cash flow forecasts.

How Libeo can revolutionise your cash flow forecasts 

With real-time payment tracking, a running total of payments made and received, and a database of past transactions, Libeo can help you perform cash flow forecasts almost instantly, and with greater accuracy than a spreadsheet:

Get real-time tracking of your total monthly purchases by due date.

Track your incoming and outgoing cash flows.

So if you want to know the future of your cash flow and spend less time on your books, why not have a chat with us? We’d love to hear all about your business and show you how Libeo can help ensure its financial success.