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3 tips to improve your cash flow forecast

November 21, 2023
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Having a solid grip on your cash flow forecast and reporting is one of the most important factors for any business to track. Given the current climate, paying attention to cash flow has become more vital to a business' success than ever.For many businesses, having an accurate cash flow forecast can help to avoid potential cash flow problems, predict end of year profits (or debt), and set realistic goals for the upcoming quarters and year.Many companies struggle to produce accurate cash flow data. Not only does this make accurate forecasting nearly impossible, but it can have a negative trickle-down effect on other reports, rendering them inaccurate as well.Here are some tips and advice on how to improve your cash flow forecasting. Adopting some of these tips can help you better manage your forecasting and improve your overall FP&A process, giving you more accurate data in the long run.

1. Plan for seasonality in your cash flow forecasts

Many businesses will see their cash ebb and flow during different points of the year. This can be due to factors such as seasonal sales and seasonal employee costs. For some businesses — Christmas tree farms or swimming pool installers in New England, for example — that seasonality is explicit and obvious. For others, seasonality of revenue and expenses exists to a lesser extent, but it's still there.To improve your cash flow projections while accounting for seasonality, start by investigating reporting from previous years to determine if your business has predictable cash flow swings. While one quarter or month might not stand out as the biggest sales month, you might notice an uptick or downswing as the year goes along. This information can be crucial in budget planning and forecasting for the upcoming year.Create a cash flow forecast that highlights the seasonality in your budget. Doing this can help you plan expenditures for predicted low periods. It can also help create contingency plans for any potential issues that might arise.

2. Evaluate fixed and variable costs

When it comes time to work on budgeting and forecasting for a new year, don’t forget to audit both your fixed and variable costs. In general, it’s good practice to evaluate these costs every year or six months.Variable costs such as office supplies or utilities often fly under the radar when the time comes to take a hard look at expenditures. The same can be said for fixed costs, such as rent and insurance. Typically, a handful of these costs can be reduced by re-negotiating a contract or making slight adjustments to the budget.It’s also important to remember recurring variable costs. These include tax payments and other employee expenses, such as months with additional pay periods.These potential savings can have a positive overall impact on your monthly or quarterly cash flow, especially during a down period.

3. Incorporate what-if scenario planning into your budgeting process

While no CFO or budget manager wants to dwell on the worst case scenario, preparation is always a good strategy to lean on, especially when it comes to cash flow. Sales is one of the most difficult figures to estimate consistently, especially months down the road.As cash flow is tied directly to sales, incorrectly projecting sales in either the positive or negative is going to have an impact on cash flow projections. Effective cash flow forecasting means doing what you can to mitigate uncertainty over the long run. That’s where what-if scenario planning comes into play.An easy way to approach this is to take your current sales forecast, then project the numbers with 10% more sales and 10% fewer sales. This won’t be a catchall for every variable, but it can be a good place to start in helping you get a handle on any potential cash flow issues if your original projections aren’t met.

Centage's FP&A software helps businesses project unpredictable cash flow years into the future, and is purpose-built to facilitate scenario planning for multiple contingencies. Learn more about how your cash flow projections can benefit from modern FP&A software: Book a demo.

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