What is Inventory and Cash Flow Forecasting?
Before you can understand why inventory and cash flow forecasting is important, you need to know what they are and why you need to forecast. Forecasting is all about preparing your company for the future to make better business decisions.
Inventory forecasting is used to predict inventory levels in the near (or far) future, allowing your company to optimize inventory management and purchase orders.
Cash flow forecasting predicts the cash flowing in and out of your business over a period of time. Although cash flow forecasting is a prediction and not 100% accurate, knowing your company’s future income and expenses can help you make more informed decisions.
Companies can forecast inventory and cash flow by using historical data to plan for the future. By analyzing buying patterns from customers, companies can better position themselves to be successful.
Why are Inventory and Cash Flow Forecasting Important?
To be successful in business, you must be prepared. Preparation is everything. Inventory and cash flow forecasting allow companies to prepare well in advance for both the good and the bad that may occur in the future.
With accurate forecasts in hand, companies can ready themselves to take advantage of opportunities and avoid impediments that might arise. For example, if the forecasting process reveals that the cost of raw materials is likely to decrease, a company might decide to hold off on, or slow, the restocking of raw materials inventory. Conversely, if the cost of raw materials is forecasted to increase, a company might decide to stock additional inventory.
As it relates to cash flow: if forecasting reveals that customer demand and sales of a product is likely to increase, a company might decide to invest in additional equipment or upgrades to existing equipment to ramp up production. But if forecasting reveals that sales are likely to decrease and, as a consequence, reduce revenues, a company might want to defer investment in equipment to a later date.
What Are Some Consequences of Poor Inventory and Cash Flow Forecasting?
Poor inventory and cash flow forecasting can result in both immediate and long-lasting detrimental impact to business operations.
When inventory and cash flow forecasting are performed poorly, or not performed at all, companies may have either over-stocked on inventory or run out of inventory altogether. Companies that deal in perishable goods, such as produce, can end up with too much inventory that ends up going to waste.
Companies that poorly forecast cash flow can end up in the precarious situation of not being able to pay important financial obligations such as taxes and insurance premiums.
How to Improve Inventory and Cash Flow Forecasting
One way that companies can significantly improve inventory and cash flow forecasting is by implementing a modern Cloud-based ERP software solution such as Acumatica Cloud ERP.
As a cloud-based Software as a Service (SaaS), Acumatica Cloud ERP enables companies to quickly and inexpensively track and forecast inventory and cash flow.
ERP software solutions such as Acumatica Cloud ERP work by centralizing company data into a single computer database. With company data located in one database, information can be easily shared across your entire enterprise.
Acumatica Cloud ERP helps companies to improve their ability to forecast inventory and cash flow by:
- Keeping track of inventory levels and vital financial data in real time: The moment a transaction occurs, the Acumatica Cloud ERP database is updated and the transaction data is available for analysis and reporting.
- Aggregating company data collected over time: The data produced by the different departments in a company can be collectively analyzed, and thus allowing greater insight to be derived than if the data were to be analyzed in isolation.
- Providing management with a big-picture overview of operations: With Acumatica Cloud ERP, company management can manipulate data into a wide variety of formats to help them identify where improvements can be made in business operations.
- Integrating data obtained from outside sources: Companies using Acumatica Cloud ERP are able to integrate data shared by customers, vendors and other sources to build more accurate forecasts.
How Far Should an Inventory and Cash Flow Forecast Look Ahead?
The uniqueness of every company means that there is no standard period of time that companies should look ahead when performing inventory and cash flow forecasting. Typically, though, that time period depends on the Cash Conversion Cycle (CCC) of the company, also known as the Net Operating Cycle.
In simple terms, the CCC is the number of days that it takes for cash invested in production and inventory to turn into a collected payment from a customer.
How S-Metric Can Help Your Company to Improve Inventory & Cash Flow Forecasting
Is your company having a difficult time forecasting inventory and cash flows? Our team of experts at S-Metric can help.
We know the importance of inventory and cash flow forecasting for businesses and will make sure that the data you consider is accurate and updated.