Our previous, Part 1 in the series: Rolling Forecasts: is it time to abandon the traditional budget? (Part 1) investigated the methodology of the rolling forecast, how it works and finding the optimal forecast frequency. In part 2 of the series, we’ll dig a little deeper to decipher the usefulness of weekly cash flow forecasts, discuss the key principles around their construction and highlight the benefits of scenario modeling.
As discussed in Part 1 of the series, preparing your business for economic and industry challenges, better equips organizations for ‘bumps in the road’ and helps mitigate the magnitude of damage, if and when a crisis occurs. But it’s not all about preparing for the worst, knowing your liquidity limits also sets the stage for windows of opportunity, whether that opportunity comes in the form of a merger, acquisition, new product launch or assault on virgin territories. Advance knowledge of liquidity potential is a clear advantage in all cases of opportunity preparedness.
How useful is a weekly cash forecast?
Operating a weekly cash flow forecast embeds a ‘cash is king’ discipline across the business and assists in uncovering impending problems within sufficient timeframes to enable the appropriate fix. It also allows a deeper understanding of all areas of cash inflow and outflow example: customer payment trends and supplier payment terms including the identification of bad debtors, the offer of early payment discount incentives etc
Understanding your organisation’s cost-of-growth is another helpful addition to the process, as some are often cash-poor due to excessive, front-end expenditure commitments which must be met in advance of securing expected revenues. Full and accurate, real-time visibility on short to medium term liquidity allows organisations the thinking time to reflect on potential financing requirements. This approach helps avoid financial failure during the execution of growth plans which subsequently have a better chance of success with ongoing liquidity support.
Knowing your cost of capital is another important benefit of a weekly rolling forecast as minimising borrowing can significantly reduce the debt burden of a business. Utilising available cash to reduce cost commitments can open the option of re-investment across the business to drive growth and profitability.
All of the above sounds great but in practice relies heavily on accurate cash flow reporting from across the entire business. In order to produce a confident rolling cash flow forecast, good working relationships must exist between the finance function and its business stakeholders. As a consequence, effective business partnering is a growing requirement across many enterprises. Great communication, trust and an environment of inclusion and accountability all work to cultivating a culture of full disclosure built around a deep understanding of the business, how it operates and the value of accurate forecast submissions. Leadership is an increasingly essential skill for senior finance professionals.
Does the rolling forecast model work for all businesses?
Regardless of business size or type, the rolling cash flow forecast is a major advantage and can be tailored to suit and meet individual business needs. Gleaning valuable insight into customer buying trends, supplier payment terms, banking relationships, understanding your cost of capital and keeping a keen eye on cash inflow and outflow frequencies facilitate an increased analytical approach to cash management.
Automation of traditional finance processes have heralded a new era of financial planning & analysis (FP&A) practices, releasing senior finance from the drudgery of resource intensive reporting practices to occupy an increasingly strategic role within the business. Technological advancement has also enabled a new way-of-work through increased interconnectedness and resource bandwidth expansion allowing finance and treasury identify opportunity or weakness within liquidity projections, at the click of a button. What organisations do with this information sets the stage for modern finance to spread its strategic wings.
Things to consider for your weekly rolling cash flow forecast
It’s not as difficult as you may think! Here’s some key factors to consider when constructing and maintaining a regular rolling forecast:
- Automate like your forecast depends on it! Remove as many manual processes and tasks from day-to-day work as you can and increase bandwidth capacity for strategic planning purposes
- Your forecast is only as good as the data that goes into it! Ensure that data is reliable and accurate before dropping into your forecast model
- Build your forecast model around a minimum of thirteen weeks (the standard quarter period)……then roll it forward at the end of each completed week to maintain that ongoing thirteen-week projection
- Update your forecast with actual performance after each week, month or quarter has been completed – whatever works best for your company. Use the variance between your forecast and actual to identify the reliability of your forecast model and make updates to your method, where required, to shorten the Forecast V Actual variance moving forward
- Build great relationships. Nurturing a culture of trust, accuracy and accountability between finance and business stakeholders is crucial to the success of a rolling forecast model. Put an agreed reporting process in place that works for everyone, explain the benefits and consequences to each subsidiary and get their buy-in. Use your variance analysis and work with stakeholders to identify where their process can be improved. Don’t be shy about handing out praise when the jobs done well!
Scenario modelling and the ‘What Ifs’
Automating manual processes and tasks, implementing a regular rolling forecast process that works for everyone, championing key disciplines to drive accuracy and taking the time to provide frequent variance analysis to each forecast contributor all work to produce a set of forecasts that provide your organisation with valuable foresight. But the advantage doesn’t stop there.
Using a rolling forecast to explore the ‘what ifs?” allows finance leaders the opportunity to ‘see into the future’ and take a peek at potential scenarios to increase profitability and reduce risk to the business. These ‘what ifs’ could include; hiking a product price within a specific sales territory, centralizing production to reduce a cost base, identifying a new revenue stream, exploring the most cost-efficient use of resources across a range of projects, reassessing cost of capital etc
The rolling forecast is an important management tool that allows organisations identify trends and opportunities, prepare for challenges and mitigate risk but most importantly, adjust and prepare for opportunity.
Look out for Part 3 in the series where we’ll further investigate why organisations need a forecast in the first place, the rolling forecast V traditional budget, challenges of the rolling forecast and driver based modelling.