All companies, despite the size or the business area, should be doing cash flow forecasting. It is an effective way to accurately project future liquidity positions based on short- and mid-term payment obligations and expected incoming cash flows.
What is a cash flow forecast?
A cash flow forecast consolidates the information of expected future cash inflow and outflow of your company’s bank accounts on a given time period. It tells you if you have enough liquidity to run your business and gives you an opportunity to better plan future actions. Also, it helps you to optimize the amount of cash in your bank accounts.
Why is it important?
Cash forecasting is valuable for companies of all sizes, local small businesses as well as large multinational corporations. First, it is a way to make sure your business never runs out of cash unexpectedly and can deal with its payment obligations. It is also an excellent way to optimize the amount of working capital, to have enough to run the business but no cash laying on accounts purposelessly. Cash flow forecasting can be and should be done on short term as well as long term. Being able to present a reliable cash flow forecast can also be valuable when negotiating external funding.
How can a cash flow forecast help a business like yours?
- You will get a better view of your company’s liquidity and where it is.
- With the information, you can optimally plan your cash distribution.
- You will be prepared for cash shortages.
- You can control currency risks.
- You will get data that helps you to make better decisions.
- It can also help you to spot harmful patterns, such as late paying customers or partners, or delays in processing purchase invoices.
Follow these steps to start a cash flow forecast
- Identify the systems or processes that contain information of future incoming cash flows; the AR ledger, order book, recurring subscriptions, etc. When extracting information from the order book, remember to keep the focus on the timing of the expected cash flows.
- Identify the systems or processes that contain information on future outflows; the AP ledger, purchase invoice processing solution, purchasing system, leasing agreements, and so on. Again, focus on the timing of the cash flows.
- Collect the information about bank account balances and actual cash flows.
- Maintain a continuous consolidation of the above data, in order to establish a timely calculation of the expected development of your liquidity.
- Evaluate the forecast against realized cash flows. How accurate was it? Improving your data based on the feedback from previous forecasts will lead to high-quality forecasts, which will make cash management much easier.
If you are thinking of preparing cash flow forecasts in Excel, think again. There are several sophisticated software solutions available, and most of them are cloud-based, which makes implementation and use carefree. A niche solution offers a high level of automation to your cash forecasting process to reduce manual work and risk of human errors. A correctly chosen tool supports the continuous improvement of the forecast quality by providing variance analysis and accuracy feedback to all involved users.
Hopefully, this post will encourage you to start tackling the cash flow forecasting challenge. With the help of suitable tools, you will get continuous visibility into your data – and after a short learning period, you will also learn how to use that data to get all the potential out of cash forecasting.