Cash Flow Management Forecasting

Apr 2, 2023

Cash flow is the movement of money in and out of a company. An organization’s cash flow is typically categorized as cash flows from operations, investing, and financing.

Cash flow remains a vital aspect of running a successful SMB, and poor management of it is a leading cause of business failure. To avoid this fate, SMBs must engage in effective cash flow management, which begins with cash flow forecasting. There are several methods used to analyze a company’s cash flow, including the debt service coverage ratio, free cash flow, and unlevered cash flow. A brief description of each of these methods are given below.

Forecasting allows businesses to anticipate periods of negative cash flow and identify when additional sources of cash will be needed. This proactive approach can help businesses avoid missed supplier payments and payroll, keeping partners and employees happy. In addition, cash flow forecasts provide early warning signs of potential cash shortfalls, allowing businesses to make necessary changes before it’s too late.

Unfortunately, SMBs often struggle to secure traditional financing, with approval rates for bank loans at an all-time low. This is especially true for minority-owned and women-owned businesses, which often have a harder time securing loans and face higher interest rates when they do borrow.

With the aftermath of the COVID-19 pandemic and rising interest rates, traditional financing is becoming an even harder sell. As a result, it’s important for SMBs to explore alternative financing options and seek out education on effective cash flow management. By doing so, they can increase their chances of success and build a sustainable future for their businesses.

  • The debt-service coverage ratio, usually referred to as DSCR is a measure of the available cash flow used to pay current debt obligations. DSCR is used to analyze companies, projects, or individual borrowers. The minimum DSCR that a lender demands depends on macroeconomic conditions (the part of economics concerned with large-scale or general economic factors, such as interest rates and national productivity).
  • Free cash flow, known as FCF is the amount of money a company has on hand after the payment of operating expenses incurred in its day-to-day business operations and capital expenditures (their cost of maintaining any long-term expenses or assets). Businesses can use free cash flow for discretionary spending in supporting and/or growing the business.
  • Levered cash flow is the amount of cash a business has after it has met its financial obligations, whereas unlevered free cash flow is the money the business has before paying its financial obligations.

 AR is a short-term liability to your customer and cash to your company. An important liability, however, as cash flow considerations can determine how long you can allow your customers go without paying.

Getting paid efficiently and faster while reducing high credit card transaction fees is a great way of ensuring steady cash flow. Contact an eTreem expert to learn how our B2B Payment Processing Platform can help to make this happen for your company