What is Cash Flow Forecasting and Why Should I Care?
October 12, 2019
Everyone in the construction industry knows that cash is king, so a cash flow forecast is critical to the growth and success of your business. Cash flow forecasting is all about predicting the future and utilizing the insights to strengthen your business. As the number of insolvencies in the construction industry continues to soar, all fingers point to the lack of financial control and poor management. It’s an interesting scenario given the management expertise and experience that the construction industry has at its disposal. This is a clear indication that with good cash flow management, businesses in the construction and real estate industries can keep operating with good financial health.
Cash flow forecasting helps you to formulate researchable questions for an in-depth study of your finances, including how you manage your cash flow, how to handle payment practices without damaging others in the supply chain, and the relationships between your company’s financial structures and the payment regimes you are subjected to.
Why Should I Care About Cash Flow Forecasting?
Cash flow forecasting is critical to the sustainability of your business as it predicts your net cash flows over a future period. The forecast estimates your cash inflows into your bank account and outflows out of the bank account. So, the result of the cash flow forecast is a near-accurate estimate of your bank balance at the end of each period (usually monthly or quarterly).
You can use your business’ cash flow forecast to:
- Identify potential deficits in cash balances – for instance, if the forecast indicates a negative cash balance, you need to ensure that there is a sufficient bank overdraft facility.
- Evaluate whether your trading performance (revenues, profits, and expenses) turns into cash.
- Analyze whether your business is achieving the financial objectives as per the business plan.
Cash Flow Forecasting in Construction and Real Estate Industries
Without a regular influx of cash in your construction, it can be difficult to take care of essential operations, like paying employees, paying subcontractors, fulfilling purchase orders, and managing payables and receivables. For many businesses, cash can be a tricky point that can quickly put you in incapacitating debts if not managed properly.
As a construction business owner or real estate investor, you likely don’t have much time to manage the accounting side of your business. You are probably focusing more on project management, but a thorough knowledge of cash flows can make a big difference in the success of your company. Here’s why cash flow forecasting matters.
#1: Helps to Evaluate Projecting Earnings
Even if you’re not a financial guru, the ability to forecast earnings is critical to running a successful business. Without detailed knowledge of what’s coming in and what’s going out of your business, it can be difficult to anticipate your overall income over a specified duration or during the lifespan of a project. If you can’t tell with certainty when cash is coming in, you’ll struggle with future budgets, which affects everything else, including fees and interests on loans, project timelines, and inventory supplies. So, failure to keep tabs on your cash flow can cost you more than you imagined.
#2: Facilitates Schedule Planning
If you have a big construction project or real estate remodeling, you can’t possibly go into the job blindly. You must plan your business around cash flows in order to stay on track and on budget. Instead of showing up with a team and hope that things turn out well, you’ll want to plan your progress down to the completion date to ensure you maximize your revenue and net worth. Cash flow forecasting can help you to base billing schedules on the anticipated needs, potential cost escalations, and average turnaround times.
At any point in the project, you want to be able to meet billing deadlines and streamline payment cycles. Depending on the nature of the project, you could schedule payment cycles anywhere between 10 days and 90 days. Knowing such details at the beginning helps you anticipate cash flow needs and determine when to pay suppliers and subcontractors.
#3: Improves Operational Efficiencies
Sometimes, you may have enough cash to rent equipment today, but your spending may jeopardize rent payments the following month. Again, you may pay your teams this week and have to slow down the project progress the following weeks as your bank accounts go black. These are some of the critical aspects that cash flow forecasting can address. Making payments in haste can result in huge interest charges, payroll errors, and work delays, which slows down your momentum. With a solid grasp on cash flow and job progress, you can keep projects moving forward with much confidence.
A construction company can easily become insolvent when it runs out of cash midway through the project. It’s no excuse to claim that you didn’t see it coming. Cash flow is the lifeblood of any project, and it’s important to forecast what is going to happen to your cash flows to survive the tides in the construction industry. If you need help with cash flow forecasting, Gina’s Bookkeeping Service can help you out. Get back to what you know best — your construction business or real estate development — and let us handle the books. We’ve been in the business of construction accounting for several years, so we understand the challenges that you face and how to manage them effectively. Get in touch with us today!
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