Using Analytics to Predict Cash Flow and Set Your Budget
Creating a monthly budget can be challenging for a business owner, since revenue often largely depends on whether or not clients pay. Some clients will pay the first day they’re invoiced, with many others paying within the week. But there are many who take the entire 30 days allotted on the invoicing terms and a few more who consistently run late.
How can a small business plan for the upcoming month when so much uncertainty surrounds the payment process? The answer could lie within the same process being used to help businesses make many other decisions: data science.
What Is Data Science?
Data analytics is the process of gathering hard numbers to learn as much as possible about a situation before making a decision. Whether this is learning how a customer interacts with your website or discovering issues within your supply chain, the result is that through using data science, you’ll have a reliable way to make decisions about your business.
Because of its growing popularity, data has also made its way into the accounting end of things. Businesses can pull analytics to gain insight into how they’re spending money, where the bulk of their income is generated, and what they can do to make improvements. Analytics are often built into the accounting solutions businesses use every day, both in the built-in reports and in a summarized version on the provided dashboard.
Analytics for Client Payments
Over time, trends usually emerge in the way clients pay. They may not pay on your own time schedule, but they’re often consistent based on their own business practices and cash flow limitations. In the early days of establishing a small business, an entrepreneur often knows offhand which clients will pay on time and which ones will wait until the due date.
Once your client base has grown, however, it can be more difficult to access this information off the top of your head. Ideally, you’ll have so many clients at this point that you’ll have difficulty keeping track of which clients have paid and which haven’t. Fortunately, you have billing software for that purpose.
Analyzing the Data
Over several months, easily-identifiable patterns will begin to emerge. By studying those patterns, you can begin to detect a pattern that will help you better predict your income in the future. This is where humans can be more precise than automated systems, which would average the number of days out, with isolated incidents simply bundled in with normal numbers.
As an example, say a client issued payment electronically within minutes of being invoiced in October, then paid a few hours after being invoiced in November. However, in December he paid nine days after his invoice. While a computer would simply average that nine-day lag in, you would know by looking at the numbers that December was a rarity and that client generally pays within 24 hours of being invoiced. While you may not be able to count on that quick turnaround every month, you can at least estimate based on it, especially if the pattern continues over many months.
Putting the Information to Use
Once you’ve identified each client’s trends, you can put it to use in setting your budget. Estimate when each client will pay within a given month based on those past trends and plan your bill-paying activities around it. You may find that you can juggle some bills for later payment without penalty, buying you a week of extra time for that week’s payments to arrive.
As for those habitual late-payers, it may be time to make some decisions. If a client’s 40- or 50-day payment turnaround causes cash flow problems for your own business, you could have a serious one-on-one conversation with that client about the issue. Chances are, he doesn’t even realize his paying habits are a problem for you. If his payment habits don’t change, it may be time to consider severing ties with that client in favor of someone who does pay his bills on time.
For true financial success with your business, set and follow a budget each month. Through the use of predictive analytics, you can estimate your monthly revenue throughout the month and know exactly when you’ll have the money in place to meet each bill.