Throughout my career, I’ve seen first hand the serious repercussions that can arise when a firm struggles to forecast its cash flows accurately. In fact, the CA ANZ has identified poor cash forecasting and management as one of the primary reasons why many growing professional services firms fail. To achieve sustainable growth in today’s rapidly changing and uncertain landscape, mastering cash flow forecasting has become a strategic necessity. The great news is that with the ongoing advancement of financial applications, accurately forecasting and managing your cash flows has never been easier.
Why Forecasting Matters
Cash flow forecasting isn’t just an accounting exercise—it’s a key part of running a profitable and resilient firm. Anticipating cash inflows and outflows over the next 6-12 months can help you:
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Manage Cash Peaks and Troughs: Professional services firms often face irregular cash flows. A solid cash flow forecast helps you navigate periods of high expenses and low incoming payments.
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Plan for Strategic Growth: Whether you’re considering new hires, investments in technology, or marketing efforts, a forecast ensures that you can grow your firm without risking financial instability.
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Prevent Surprises: Unexpected expenses or client payment delays can disrupt cash flow. Forecasting gives you foresight to manage such scenarios, reducing the risk of running into a cash crunch.
How to Build a Strong Cash Flow Forecast
Building a reliable forecast doesn’t have to be overly complicated, especially with the right tools at your disposal. Here are three popular software options that can help you streamline the process:
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Xero Xero offers an intuitive interface that allows firms to create detailed cash flow forecasts based on their actual financial data. With its easy integration into your accounting system, you can automatically update projections in real-time, helping you manage client payments and track overdue invoices.
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Float Float is a cash flow forecasting tool designed specifically for professional services firms that need real-time insights. By pulling data from your accounting software (like Xero or QuickBooks), Float gives you visual forecasts, helps you track future cash scenarios, and shows exactly when you’re likely to run out of cash—so you can plan ahead with confidence.
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Fathom For firms looking to combine forecasting with deeper financial analysis, Fathom is an excellent choice. It offers powerful reporting, budgeting, and forecasting tools that help you track key metrics and visualise your firm’s financial health. Fathom is particularly useful for multi-dimensional forecasts, including scenario planning for different growth strategies.
Practical Steps to Create Your Forecast
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Start with Realistic Projections Review your historical financial data. Understand revenue trends, seasonality, and client payment patterns. Be conservative when projecting income, and ensure you’re realistic with your expense estimates.
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Understand Client Payment Cycles In professional services, payments can often be delayed. Track typical client payment timelines and integrate these cycles into your forecast. This will help ensure you know when cash is actually going to hit your account.
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Update Your Forecast Regularly Cash flow forecasts aren’t static. They need to be updated as new projects come in, clients pay invoices, and unexpected expenses arise. I recommend updating your forecast monthly for the most accurate outlook.
Budgeting for Success
Once you have your forecast, the next step is to align it with your budget. A budget provides the framework for managing expenses and ensuring that your firm stays profitable, even as it grows.
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Break Down Costs: Understand your firm’s fixed and variable costs. Fixed costs like rent and salaries should be accounted for, while variable costs (e.g., contractor fees) need close monitoring to prevent overspending.
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Plan for Investments: Growth requires investment, whether in people, technology, or marketing. Your budget should set aside funds for these areas without jeopardizing day-to-day operations.
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Maintain a Buffer: Every professional services firm should maintain a cash reserve for emergencies or unexpected costs. Typically, a buffer of 10-15% of operating expenses is recommended.
Final Thoughts
Cash flow forecasting and budgeting are often overlooked by professional services firms until they face a crisis. But by taking a proactive approach—supported by the right tools like Xero, Float, and Fathom—you can ensure your firm is well-positioned to grow while maintaining financial stability.
By staying on top of your cash flow and planning your budget strategically, you’ll build a firm that’s not only profitable but also resilient in the face of change.