Reasons Cash Flow Forecasting
Is More Important Than P&L

Critical Reasons to Get Serious About Cash Flow

It’s an uncertain environment for SaaS companies and startups right now. During 2020 and 2021, investment opportunities were readily available and new deals were being announced seemingly every day. Now, however, it’s a slightly different story. While seed funding is still going strong and the top SaaS companies are growing rapidly, it’s getting more difficult to secure Series A funding and beyond, and SaaS multiples are in decline. 

Todd Gardner of SaaS Advisors reports that tech company IPOs dropped 92% in the first quarter of 2022, which feels like a sucker punch after the freely flowing venture capital we saw in the wake of Covid. Most experts agree that an economic slowdown is brewing, although it’s uncertain when or how significant it will be.

The good news is that customers are still buying. While forward revenue multiples may be at their lowest in three years, SaaS giants like Amazon, Microsoft, and Google are driving huge ARR numbers this year. The takeaway? While it may be extreme to say the sky is falling, it’s still crucial to pay attention to the weather report. 

So how can you be prepared? 

5 Reasons to Improve Your Business Cash Flow Forecast

It’s Time To Utilize a 13 – Week Cash Flow Forecast

One of the best lessons I ever learned working for a private equity-backed company was the value of a 13-week cash-flow forecast. Let me tell you: There is a reason the smartest financial engineers in business always have them. Staying tuned in to cash means you have the data you need to make the right decisions, even when unexpected things happen. 

Here’s a case in point: All of CFO Alliance’s clients fared well through Covid, even as seismic shock waves were rippling through the economy. They were highly disciplined in accounting/finance before the pandemic occurred, and they had the right systems and process in place to harness great data that kept them stable through the worst of the uncertainty. With those tools in place, they also had the confidence to make effective decisions in the heat of the moment.

Keeping a close eye on cash feels intuitive during uncertain times, but what about periods of growth? Do you really need to look that far ahead when things are going well? Absolutely. A 13-week cash flow strategy is your best friend during periods of growth because even if your P&L shows a strong profit, your cash flow plan allows you to test any number of scenarios to make sure you have enough liquidity. It helps you plan for the future by taking steps like ensuring access to availability on a line of credit, maintaining access to cash reserves, and building a strong relationship with your banking partner.

While P&L budgeting helps you remain profitable to ensure a long-term future – and is vital for success – cash-flow forecasting helps you make sure you have the right amount of cash available. It puts you in the driver’s seat to deploy your most precious asset strategically rather than reactively. 

And that just scratches the surface. Here are four more reasons to get serious about cash flow strategy.

Four Mission-Critical Reasons to Improve Your Business Cash Flow Forecasts

Growth

For a business to grow, it must have a well-built infrastructure to support increases in volume, speed, and agility. All too often, businesses aren’t planning their future cash-flow forecasts effectively, which creates unpleasant cash flow surprises like short-term cash deficiencies. That’s why it’s critical that you maintain a 13-week cash flow strategy even when your business is growing and experiencing strong sales. It’s still easy to have more money going out than coming in, and that could result in the failure of the business, despite an increase in sales.

Agility

Clear cash flow numbers give you the clarity to see where you’ve been so you can effectively determine where you should be going and how to get there. When you closely monitor and understand financial trends, (such as how many days it takes your customers to pay), you will have the data you need to course-correct quickly when necessary. 

This ability to pivot quickly is what kept many businesses afloat during Covid, and lack of agility is what sent others into a downward plunge that couldn’t be reversed. A firm grasp on cash flow will keep your business on the positive side of that scenario. If we experience another downturn this year or in the future, cash flow will be your life raft, replacing financial distress with clarity and peace of mind. 

Confidence

Cash flow forecasts build confidence for owners, investors, and banks because they provide visibility and control. With multiples in decline and investment opportunities drying up, businesses need strong financials more than ever if they hope to secure funding. Investors want to know that the business has the structure and stability to remain profitable even in periods of downturn. 

Creating confidence is more than just painting a rose-colored picture of your business. It’s showing that you have the financial resilience to withstand periods of stagnation as well as periods of growth.

For example, Zoom stock skyrocketed during 2020 when everyone desperately needed to implement virtual solutions quickly, but by March of 2020 it had fallen 80% from its 2020 peak.  They’ll need to pivot once again to find the right path forward now that the business environment has shifted.

Control

Plan and prepare and project as we might, in business as in life, not everything is within our control. Beyond your control? Costs going up, customer spending going down, and broad economic conditions. Even in these scenarios, however, there are things you can do to stay ahead of the curve. You can make course corrections that will protect your business and your cash flow. By getting accounts receivable paid earlier or slowing down payments to vendors, for example, you can positively impact your cash flow over time.

Put Your 13-Week Cash Flow Strategy
in Place the Easy Way

If you haven’t implemented a 13-week cash flow plan before, it can feel intimidating. But it doesn’t have to! At CFO Alliance, we understand that you have a mile-long list of goals and initiatives and rarely enough hours in the day. That’s where we come in. We take the stress out of finances so you can focus your energy where it’s needed most: on running and growing your business.

Contact us to start developing your cash flow strategy today!  

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