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5 Keys to Accurate Cash Flow Forecasting

Updated: Sep 8


Nothing is more crucial than your cash flow prediction when creating your financial forecast for your business strategy. Your cash flow projection is all about estimating how much money your company will require and when it will need it. Even if you have the finest plan and the best staff globally, it won't matter if you can't pay your expenses. You never want your company to run out of cash, and a cash flow projection may help you anticipate when your bank account will be deleted. Accurate cash flow estimates and financial strategies can help you determine whether or not you can afford to leap.

cash flow management

Five keys to accurate cash flow forecasting

We're going to go over five important things to consider when generating your cash flow projection.

  1. Keep in mind that profits and cash are not synonymous.- There's one thing we need to clear up right now: profits aren't the same as cash. Profitable businesses can run out of cash, and they do so frequently due to inadequate cash flow management. Here's a brief explanation as to why this happens. When your company makes a sale to a client but that consumer does not pay their bill for 30 or even 60 days, the value of the transaction appears on the Profit and Loss Statement (also known as a P&L or income statement) possibly boosting your earnings. However, that money does not appear in your bank account until the consumer pays you. So, while your company may produce many sales and be successful, it may be cash-strapped because consumers haven't paid for their products or services yet.

  2. Impact of Money derived from receivables on cash flow- The money due to you by your clients is known as accounts receivable. You have accounts receivable if you send out invoices and then wait for clients to pay you. This isn't always a bad thing, and it may help you improve sales by giving you more purchase options. All you have to do now is figure out how it affects your cash flow. The first item to consider is the percentage of your overall sales "on credit," or transactions for which you issue invoices. If you just sell to other businesses, you're probably doing all of your business on credit. However, if you are paid right away by certain clients and send invoices to others, you'll want to figure out what proportion of your sales are on credit vs what percentage is paid right away. The purpose of this exercise is to determine what percentage of your sales will wind up in your balance sheet's "accounts receivable" row. Your accounts receivable will drop when you receive payment, and you will report the new cash on your cash flow statement. Another issue to consider is the average time it takes for your clients to pay you—“days to be paid”. Even if your invoices read "Net 30," there's a strong possibility that your clients will pay you in 45 days rather than 30. Make an educated guess at this figure and use it as a guideline for cash flow forecasting.

  3. The financial implications of payables- Receivables are the polar opposite of payables. This is the money you owe your suppliers. You may have gotten a charge after purchasing something for your company. You'll note the money you owe on your balance sheet's "accounts payable" row until you pay the bill. When you pay a bill, it reduces your payables, and the money leaves your bank account, easing your cash flow statement. You'll want to experiment with two distinct factors, just as you did with receivables: the proportion of your purchases made "on credit" and the average number of days it takes you to pay your invoices. You may use these figures to influence your cash flow estimate. Perhaps you could pay your vendors more slowly, allowing you to keep more cash in your business, or you might pay for more of your purchases on credit.

  4. Inventory- When you sell your goods, inventory is reported as a cost—you only record the charges directly connected to what you sold in that month. This is what your profit and loss statement will display. So, if you intend to sell 100 widgets next month for $20 apiece, your inventory cost (technically known as a Cost of Goods Sold) will be $2,000 on your profit and loss statement. However, you could have bought 1,000 widgets a few months ago, and they're still lying in your warehouse. When you pay for the widgets, the money you spent to buy them comes out of your cash flow projection and is not an expense on your profit and loss statement. As a result, the funds will come from your cash flow projection whenever you buy new inventory, and the inventory will appear as an asset on your balance sheet.

  5. Consider varying scenarios- It may be beneficial to develop numerous distinct scenarios when creating a cash flow projection. For example, assume you operate in a field where a possible tariff might jeopardise your future profits. Although it hasn't happened yet, it would be beneficial to know your financial condition if it does. You will be able to visualise the impact of specific future situations and rapidly modify your company's procedures if you construct numerous scenarios with your company's future cash flows. These scenarios should be simple enough to create if your forecasting process has been automated, so you won't have to rush in a reactionary manner afterwards.


The five techniques we have discussed here may make a big difference in your cash flow. It may take some time to lay the groundwork, but it's worth it to play around with different factors to figure out when you'll run out of cash and what you and your company can do about it.

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