10 ways to improve your cash flow forecasting

category cash forecasting

by Stijn Boon

reading time 3 min

10 ways to improve your cash flow forecasting

Cash flow forecasts are crucial for business continuity and can be a very powerful tool for businesses if done well. A good cash flow forecast provides transparency into future cash flow surpluses or shortages which allows companies to make informed strategic decisions.

 

Despite all the available tools, many companies still struggle to predict cash flow projections. Especially when your operations are international, with several employees, business units, financial systems, and banks, it can easily become complicated to manage all the available cash flow data. As a result, companies sometimes fail to identify financial risks or even cash surpluses that could be used for potential business opportunities.

 

There are many strategies your business can start using today to improve its cash flow projections. While it depends on each business how you do it, here are 10 ways to help you improve your cash flow forecasting practices.

 

Best practices to improve your cash projections

 

1. Automated cash flow data consolidation

One of the best practices to improve your cash flow forecast is to consolidate all cash flow data automatically into one place. Most companies collect their cash flow data in spreadsheets manually. This is often fine until your business starts growing. Collecting cash flow data from different sources with several users is time-consuming and prone to error. To solve this, businesses typically implement cash flow forecasting tools that automatically fetch cash flow data from different banks and systems allowing them to centrally manage cash forecasts without it heavy time consumption or errors.

 

2. Build different scenarios

Many finance professionals build different cash flow forecast scenarios. Traditionally, they include a best-case scenario, worst-case scenario, and a most-likely case scenario. Running different scenarios enables you to proactively prepare strategic plans with your company for any financial deviations. Though it is a good start to prepare for different scenarios, it does not always prepare you for circumstances that are out of your company’s sphere, like geopolitical tensions or natural disasters for example.

 

3. Rolling cash forecasts

It can be helpful to analyze historical data to improve future cash projections. This is exactly why rolling cash flow forecasts were invented. Better understanding your company’s historic performance and business continuity trends can give you a clearer idea of what might be coming for you in the future. Rather than static cash flow forecasts, rolling forecasts are frequently updated throughout the planned period of time to reflect any changes.

 

4. Planning for the right period

Cash flow forecasts need to be adapted for the right timeframe. Consider whether you are forecasting for the short, medium, or long term. Short-term forecasts typically include day-to-day breakdowns whereas longer-term forecasts are grouped into generic cash in- and outflows that can easily exceed one year. Picking the right period goes back to what you wanted to achieve with your cash forecast in the first place, and then picking a suitable method.

 

5. Working capital optimization

One important aspect of both liquidity management and cash flow forecasting is working capital management. You should always aim to get a clear understanding of your company receivables, payables, and current assets at hand as well as how much of it is flowing in and out, and at what times. By optimizing working capital, you gain clarity on exactly when you pay counterparties and receive money from them, and how it affects your cash positions over a given period of time. As a result, it allows you to see how working capital affects your cash projections.

 

6. Compare budgeted versus actuals

The only way to improve your cash flow forecasts is to compare the actuals versus what you budgeted. Examining variances and accuracies between them will help you adjust your next forecasts for them to become more precise.

 

7. Regularly update cash flow forecasts

One way to improve cash forecasts is to regularly update them to reflect changing circumstances. By updating them regularly you can identify how well you are on track against companywide targets and adjust your company’s strategies accordingly.

 

8. Set automatic reminders and deadlines

By setting automatic reminders and deadlines for your team you can ensure that all stakeholders, for example from different entities, that need to contribute to the forecast are filling out their cash flow data in time. This can help prevent missing data which in turn improves the reliability of your cash forecasts.

 

9. Improve regular revenue forecasting

You can significantly improve your cash forecasts by being able to identify what new revenue sales will bring in or how many customers might churn. Forecasting revenue is an important element of your forecasts since it also determines how much cash you can burn over time without any liquidity risks.

 

10. Use the best available tools and techniques

There are plenty of tools out there that can help you improve your cash flow forecasts. Though spreadsheets can be a good start, any larger entity with complex technology stacks and bigger teams typically uses more advanced tools that help them run their cash flow forecasts. Some of the more advanced cash flow forecasting tools these days even include predictive analytics and artificial intelligence. Tools can also provide you with the possibility to run different cash forecasting techniques automatically. Think of Monte Carlo simulations, CFaR, or the impact of seasonality trends on cash flows.

 

There is no silver bullet to cash flow forecasting. Yet, it remains crucial to do thoroughly to enable business continuity. In the end, you need to allocate sufficient time to analyzing your cash flow forecasting processes in order to improve them. The forecasting tools, systems, methods, and techniques you can use depend on the type of business you are in. The more complex your cash flows become the bigger the need will be for an automated cash flow forecasting solution.

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