Dealing with cash flow forecasting problems and solutions isn’t just another chore for busy small business owners – it’s a matter of survival.
Poor cash flow forecast management can be disastrous for your business; it can be challenging to get on top of it if you:
- Don’t have the time and expertise to handle cash flow tasks
- Don’t have enough cash to spare to invest in digital cash flow forecasting software
- Don’t understand the complexities of cash flow cycles and how they impact your business
If you’re experiencing these challenges, you’re not alone. 60% of small to medium-sized enterprises (SMEs) struggle with cash flow management and forecasting, according to payments specialists PYMNTS.
The first step is to identify these problems and solve them.
Read on to learn more about the most common cash flow forecasting problems and solutions, and how you can apply them in your business.
Don’t let cash flow problems hold your business back. Explore Lula’s digital banking solutions today for tools and features that help streamline your cash flow management.
What is a Cash Flow Forecast?
A cash flow forecast is a projection of your business’s expected cash inflows and outflows over a period of time.
This can be a short-term prediction, like three months, but many businesses prefer to look one, two, or even five years down the line.
As a business owner or executive, it helps you understand your company’s cash flow position better. You can anticipate shortages or surpluses and make better spending and investment decisions based on them.
An accurate cash flow forecast helps you keep up debt repayments, manage spending and stash funds for seasonal (and unexpected) fluctuations.
A well-structured cash flow statement, meanwhile, provides a historical record of these movements and offers valuable context for your future projections. Getting a hold on your cash flow can help you improve your business’s financial health and long-term success and gain deeper insights on effective cash flow management.
One way to think of good cash flow forecasting is as the financial pulse that keeps up the day-to-day financial health of your business.
Yet, it’s also very easy to get it wrong and overlook early warning signs of liquidity trouble.
6 Common Cash Flow Forecasting Problems and Solutions
Cash flow forecasting issues can affect every type of business, from large corporations down to a sole trader.
Knowing what these dangers are and the preventive actions to deal with them will help you prepare for several unexpected outcomes. Thinking proactively, after all, is important for any successful business.
Here are some of the most common challenges businesses face with cash flow forecasting:
1. Manual data entry
Manually typing data into spreadsheets is still the most common way of setting up cash flow forecasting – 72% of businesses do this, according to PYMNTS.
Yet this approach is vulnerable to human error, with mistyped numbers and misfiring formulas. Workers also often mix up data formats across different departments and financial periods, which adds to forecast inaccuracies.
Manual updates are also extremely time-consuming. 76% of data entry workers say they spend up to three hours a day simply moving data from one place to another, before they even think about entering it into a spreadsheet.
This adds up to a huge amount of hours spent on manual work that businesses could instead allocate to strategic initiatives that help the business grow.
The solution
Ditch manual spreadsheets. Automated cash flow forecasting with software or dynamic templates saves time, cuts errors and provides real-time financial visibility.
Many cashflow solutions can be integrated with your accounting software to instantly transfer data, saving you hours.
2. The pitfalls of flawed and historical data
Getting cash flow forecasting right starts with good information, but many SMEs struggle with limited data, which results in inaccurate predictions.
New businesses face an extra hurdle. They often turn to general industry data that doesn’t truly represent their specific situation.
Relying too heavily on past performance is another pitfall. What happened before might not reflect the future, especially in an unpredictable South African market.
The solution
Don’t just take past data as gospel.
Review past figures with a critical eye that’s in tune with your current situation. Think about your business plan for the future. How will new strategies or market shifts impact your cash flow?
For example, if you’re a restaurant expecting a rise in delivery orders after partnering with a popular app, you should adjust your future cash inflow projections upwards, even if historical data doesn’t reflect this.
You can create a much clearer and more useful financial road map by adjusting your forecast based on current trends, rather than simply looking in the rearview mirror.
3. Disconnected data clouds your financial vision
Trying to understand your business’s health with fragmented data is like trying to solve a jigsaw puzzle with pieces from several different puzzles – you’ll probably work it out eventually, but it’ll take you a lot of extra time and effort.
If your accounts receivable, payroll and bank account information live in different silos, getting a clear and complete financial picture becomes a real struggle.
You might see cash coming in, but miss the outgoing payments – or bigger financial trends that impact your financial stability.
Data fragmentation is a major headache for many SMEs because it obscures the true state of their financial health and makes effective cash flow management incredibly difficult.
The solution
An accurate cash flow forecast needs to connect your business’s dots.
Important financial statements, like your income report and balance sheet, should all be in one place to give you a consolidated view. This way you can see how your sales translate into actual cash, how your assets are being used and how your liabilities impact your cash flow.
Cash flow management tools can help you do this with fully integrated dashboards and built-in reporting so that you can really see what your business looks like.
4. Communication holes cause forecasting leaks
Think about your business as a team rowing a boat. If each person is paddling without knowing where the others are going, you’ll likely go in circles.
The same applies to cash flow forecasting. When different team members operate in silos and don’t share information, your forecast becomes unreliable.
In larger businesses, poor cross-team communication – like sales not updating expected deals, or operations missing supply chain issues – prevents finance from accurately forecasting cash flow.
It can also impact SMEs when the owner, handling both sales and operations, might forget to include potential delays or upcoming large deals in their own financial projections.
This lack of communication is a major contributor to cash flow problems, especially with the widespread issue of late payments impacting businesses.
The solution
Regular communication and teamwork in the cash flow forecasting process are key.
Sales staff know about possible deals, which they must communicate with operations staff who understand potential expenditures and delays.
A collaborative forecasting tool, where everyone can sing from the same hymn sheet, can also be extremely useful here. Some of the latest models offer a dashboard view and reporting that team members can easily access.
5. The drag of unpaid invoices
For many South African SMEs, the lifeblood of their cash flow – accounts receivable – can become a major pain point.
Late payments and a growing pile of outstanding invoices directly stifle cash inflows and thus your working capital, not to mention your business’s progress.
“South African SMEs have to wait 70 days on average to receive their customer payments, even if they agreed to 30 or 60 days. This is a cash flow killer, which massively impacts a business and needs managing,” says Thomas McKinnon, Lula’s Chief Growth Officer.
These cash shortages also make it difficult to cover immediate expenses and manage accounts payable that can ultimately hinder your business’s financial health.
The longer invoices remain unpaid, the more pressure it puts on your day-to-day cash flow.
The solution
Take control of your accounts receivable.
Digital tools can also help you streamline your invoicing processes for automated invoices, reminders and quicker deliveries.
Offering shorter payment terms to your clients is one option, but you may lose customers doing this. A Buy Now, Pay Later facility like Lulapay is an alternative where a third-party provider pays you for these invoices, and your customers pay them directly via a repayment plan.
6. The danger of static forecasts
Many South African SMEs invest time in creating cash flow projections, only to treat them as static documents. This approach provides a snapshot in time that quickly becomes irrelevant.
Your business is constantly evolving with new opportunities, challenges and shifts in the market conditions. If your cash flow forecast remains unchanged, it no longer reflects your actual financial health or anticipates future cash flow.
Seasonal fluctuations, which significantly impact many businesses, also won’t be accurately accounted for in an outdated projection. You’ll be unprepared for unexpected shortfalls or opportunities as a result.
The solution
The first step is to recognise that your cash flow forecast is a living document that requires regular attention.
Then, establish a schedule for a regular review of your projections and compare them to your actual financial performance. Identify any discrepancies and try to understand the underlying reasons for them happening.
You can now use digital tools that consider metrics like your business needs, market conditions, and upcoming plans to provide you with real-time forecasts. Having the latest snapshots will help you upgrade your decision-making and make the best use of your finances.
Stop Guessing, Start Knowing: Streamline Your Cash Flow with Lula
Getting to know the cash flow forecast problems and solutions that affect your business can be a painful process. Start by downloading and completing this cash flow statement template, get a clear view of your business’s cash inflows and outflows and gain full control over your financial success.
Mountains of spreadsheets and inaccurate data can muddy your vision and cost you time and money, creating a sizeable obstacle to business success.
“We know that businesses want to get better at tracking their cash flow and want to get out of their spreadsheets every night. Lula’s solutions have a suite of flagship features that can help them do this,” says McKinnon.
Lula provides you with the tools you need to gain better control of your finances, including:
- Payment Controls: Delegate the management of your outgoing payments while staying in full control for accurate and timely transactions.
- Multicompany: Oversee the finances of multiple business entities from a single log-in.
- Mobile app: Monitor your financial data and transact on the go.
Lula also supports your cash flow with funding options, like our Revolving Capital Facility and Capital Advance.
This can help you unlock a flexible cash reserve for unexpected expenses and cash shortages. You pay only for what you use – with no monthly fees or paperwork – and can apply for funding increases as your business grows.
In the South African economy, where managing cash flow and securing funding can make or break your business, Lula gives you the confidence and control you need to meet this challenge head-on.
