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Timing is critical in business, and unforeseen shortfalls in your cash position can be detrimental to operations and morale. Cash flow forecasting, driven by historical accounting data and your own understanding of the rhythm of your business, could be the key to helping you see around corners months in advance.
Cash flow forecasting involves a multitude of data derived from sales, payroll, receivables, inventory, and payables. Given the myriad variables and components, the process can overwhelm even those who are familiar with the process. Fortunately, there are resources to help you tackle the job:
> Online Templates. Web-based templates, though somewhat limited, are widely available and will guide you through the manual process of entering your data in the simplest of terms.
Examples: score.org, SBA.gov, Google Docs
> Software Add-ons. Cash flow modules available with your accounting software package are more automated, allowing you seamlessly apply historical financial data to sales, receivables, and payables.
Examples: QuickBooks, Xero, FreeAgent
> Customizable Systems These personalized programs will import your unique financial data from the company’s existing accounting system to generate robust forecasts and will permit you to toggle parameters to explore different what-if scenarios. Some forecasts are sharable online, allowing multiple users to collaborate in real-time.
Examples: Float, Dryrun, Pulse
Enhance the reliability of your cash flow projections by following these simple guidelines:
> Timing. Apply two years of historical data to your forecasts and project only 12 months in the future.
> Variables. Look beyond fixed costs to include fluctuating expenses (i.e., quarterly taxes, insurance premiums, seasonal inventories and sales variations, months with three payrolls).
> Assumptions. Make educated assumptions based on knowledge of your business. For example, use an average number of days your customers pay invoices to determine influx of cash and remember that cash flow depends on paid sales, not just contracted sales.
> Comparisons. Maintain an iterative, rolling 12-month projection to continuously identify variances in data.
Economic uncertainty can confound even the most carefully crafted forecasts, causing a thriving small business to suffer. Without a sufficient, reliable stream of revenue to pay expenses, a business caught off-guard can quickly go into the red, making it difficult to recover.
While you can’t control the financial markets or consumer habits, you can take steps to increase income and reduce operational expenses by crafting a thoughtful and detailed budget that can help protect you from the unexpected. Here are four budgeting best practices to consider adopting today:
To learn more and to download an in-depth white paper on this topic, click here.