Key Variables for Predicting the Most Accurate Cash Flow Forecast
Any business owner would love to be able to foresee the amount of profits and losses on a weekly, monthly, or annual basis. Fortunately, this is not a completely far-fetched idea with the help of a reliable cash flow forecast.
Forecasting is the process of estimating a company's financial position for the future using historical data and past sales figures. By utilizing the right information, it's entirely possible to come up with a forecasting process that can foresee possible business challenges or dips in cash inflows in time to prepare.
Things to Consider
Restaurants, retail establishments, hotels, and similar industries usually store precious data regarding income and expenses in their current POS systems. Using this information and other internal or external variables such as seasonality, business owners can start to piece together an accurate projection of future profits and losses.
Before attempting to produce cash flow projections, ensure the establishment has the following-
- A detailed and organized sales process - All employees should be applying the same consistent methods to identify sales opportunities. This provides structure to operational practices.
- Individual and team quotas - Each staff member or team should be given tangible, set quotas to work towards. After each quarter, if the majority of the team is failing to meet the KPI's, it's time to examine the situation and take corrective action. This can also help to gauge everyone's performances objectively.
- Accountability - This entails following up whenever an employee fails to reach their sales quota for the given period and attempting to understand the issues and bottlenecks so it doesn't happen again.
- Customer relationship management - CRM is the consistent practice, guidelines, and principles that staff members should follow when interacting with customers. Tracking this is vital, as it improves the customer's overall experience.
- POS data - This data allows businesses to optimize their operations and understand the most and least popular items within their inventory. With this in mind, companies will be in a position to better cater to consumer needs.
What Is the Importance of Accuracy?
Accurate projections can help identify problem areas in cash management and allow businesses to take the appropriate measures to optimize their financial plans. This information is useful for-
- Stabilizing inventory management - Reliable projections can help predict future demand and therefore, assist in proactively managing inventory. Understanding future demand and preventing stock-outs or overstocking puts businesses ahead of the competition, as they will always be supplied with the appropriate amount of inventory.
- Simplifying financial planning - With an accurate forecast, businesses will be able to estimate the sales income and cost of operation. This is vital information that will enable companies to make informed decisions when allocating resources, setting goals, and hiring new employees.
Internal vs. External Factors
Generally speaking, there are two kinds of variables or factors that can affect estimated cash projections. While historical trends and past data can be helpful in mapping out average cash flows for the future, to increase accuracy, it's important to factor in these extra variables as well-
Any changes within the business can affect the overall financial forecasts, as these factors can either increase or decrease the cost of operation. It's important to keep this in mind when drafting projections, as these seemingly minor variables can leave large gaps in the forecast if they are left ignored.
- Changes in policy - The implementation of new policy changes, including sales promotions, advertising, organizational structure, and pricing policy, can all affect the business's estimated sales. Therefore, it's important to factor in these changes in the forecasting process to keep all the relevant stakeholders well informed.
- Hiring or replacing employees - Onboarding new employees can be expensive, as it will take them longer to adjust to their roles and they will need time before they are fully independent. However, if businesses can keep quality staff for longer periods of time, the company will save on labor-related costs and generate more revenue as a result.
- Changes in the market - Businesses need to pay close attention to consumer trends in order to keep up-to-date with changes in demand. Changes in the market reveal the shifts in customer demand and behavior; therefore, the forecast should reflect this information for increased accuracy.
- Seasonality - It's important to also take into consideration whether the time of year can affect the popularity of an item or service. Carrying seasonal products such as winter coats or seasonal menu items means the inventory will need to be updated regularly throughout the year to reflect the changing availability and demand. Other possible examples of seasonality include national holidays or local events that could result in higher foot traffic.
- Economic conditions - During harsh economic times, consumers are less likely to spend, especially on luxury goods. On the other hand, a boost in the economy and the national employment rate will lead to an increase in consumer spending. An effective cash flow forecast should accurately reflect the current economic conditions for increased accuracy.
Using Historical Data
When it comes to cash projections, past sales data stored on POS systems can provide highly valuable information, especially for companies who experience similar volumes of sales year after year, without huge peaks or dips in demand. By observing this information, owners can roughly estimate expenses and predict sales income for their businesses.
For example, if last year's profits for June was recorded to be $50,000, the profits for June of this year would be roughly the same.
If the demand is expected to increase from the previous year, businesses can also add the expected percentage of growth to reflect this, for instance, a projected 10% increase in demand due to better economic conditions would raise the June revenue estimates to $55,000.
However, exclusively relying on historical data would fail to take into consideration the many variables affecting demand and sales traffic today. By accounting for all of the variables above, businesses can increase the accuracy of their cash flow projections and optimize their spending habits.