Quarterly Forecasting For Profitability and Cash Flow

After budgeting, forecasting is another essentially task for any business. The two acts are similar; however, they yield different results. A budget is an estimate of your company’s revenue and expenses over a given period, usually the financial year.  In many ways, it’s a status report on your cash flow and financial position and what your expectations are for the future.

Forecasts on the other hand, are estimates of your financial outcome that typically concern key revenue items and your overall expenses. Forecasts draw heavily on historical data as well to predict what will occur.

In short, while a budget is a plan for what you want to happen, whereas a forecast is a projection of what will happen. Both are important, and forecasting may be more so, especially where profitability and cash flow are concerned.

Why Forecasting Matters To Profit and Cash Flow

Forecasting is generally done on a monthly, quarterly, or annual schedule. In truth, all are useful. However, monthly forecasting is typically used to project out for only that current month. Such may be the case when you want to see if your revenue will be sufficient to cover your monthly expenses or if you need to adjust to account for a holiday or seasonal shift in business.

Like forecasting and budgeting, profitability and cash flow can be similar but they can also be very different. Both matter to your business. Your business can be profitable and still not have enough cash. In the worst cases this will lead to bankruptcy.

How does this happen? Cash flow is the money that is flowing into and out of your business and is what you need to pay you debts. You may be selling a lot of products, but if your buyers aren’t paying on time it can negatively affect your cash flow. At the same time your expenses need to be paid as well. When the two aren’t in synch, your cash flow suffers.

Forecasting takes this into account, especially given the historical data you have to work with.  This allows you to adjust your spending as needed based on changing conditions such as a buyer who doesn’t always pay on time or who reduces their orders. Even holidays and seasons may impact your operations.

In short, things change and an accurate, data-driven forecast helps you adjust so you aren’t caught in a bad spot. When you adjust your forecast you are able to see a projection of your finances and how they will respond to the changes. If your cash flow is affected negatively, you’ll know that other resources may be needed to cope.

The Goal of Profitability

The goal of every business is to generate revenue that turns into profit. A budget helps you plan on how to get there and a forecast shows you what will happen on your way. The two are intertwined, and a good forecast will inform your budget and help you create an effective one.

With sound financial planning, a budget and forecast keep your business on the right path and with the ability to adjust to changing conditions. This helps you manage your cash flow and put you in a better position to become, or remain a profitable company.