Being able to predict cashflow is vital for all small and medium-sized enterprises (SMEs). That’s why they need to harness the use of open accounting financial data.
By analysing and using this data, businesses can get a better picture of their financial position and improve their budgeting and forecasting. It also enables them to develop a better relationship with their bank, as well as allowing for greater transparency and accountability.
SMEs can build up more trust and credibility by sharing their financial data with their banks and other financial institutions. In the future, this can help them with the cashflow as they can more easily secure loans and other finance.
Firms can also show customers, suppliers and other stakeholders that they are responsible and well-managed by making their financial data public. As a result of building trust and loyalty in this way, they can drive sales and revenue too.
But most importantly, companies can see what is happening with their finances by studying real-time data on their income, expenses and cashflow. Subsequently, they can work out where they can save money or make more revenue. They can also use it as leverage to negotiate improved vendor deals, cut out unnecessary expenditure or identify ways to reduce costs. On the revenue side, they can determine products or services in high demand or new markets.
By looking at this historical data, SMEs can also project their cashflow requirements in the future. The information collected from examining their income, expenses and cashflow over time can be used to make more accurate budgets and forecasts, thus avoiding any cashflow issues. Given that 82% of businesses fail due to poor cash management, getting cashflow right is vital.
Using the right data
But all of these benefits are obsolete if businesses don’t have the relevant data to start with. To refine this, they need to take into account many different variables. They may include seasonality, terms of payment, the time taken between finishing work and getting paid, and ways to encourage people to pay on time. Then they need to analyse it by looking at their incomings and outgoings, which may include payroll, inventory, supplies, rent or mortgages, tax obligations and other monthly costs or one-off large future outlays.
Regular forecasting
As well as having the right data, companies need to carry out regular forecasts to keep them up to date. That means doing one, three and five-year forecasts, and keeping track of revenue on a weekly basis. Thus, they can quickly identify when and which expenses need to be reduced, as well as opportunities to invest in and grow the business.
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Predicting different scenarios
Cashflow forecasting is based on three different scenarios. The first is the base case, which is calculated according to a normal business-as-usual forecast. Then there is the worst case scenario, which is based on factors such as the highest possible discount rate, inflation rate, input pricing and interest rates, and finally, the best case, which may include the highest possible revenue growth rate and lowest possible expenses, rates and favourable economic conditions.
Financial forecasting tools
The good news is that there are plenty of online financial forecasting tools out there that can be used for cashflow forecasts. By using the data from the company’s accounting software and databases, they can be customised to show predictions over different time periods.
SMEs can better plan for the future if they’re able to more accurately forecast their cashflows. In these increasingly uncertain economic times, it’s more important than ever to keep on top of their finances.