You wouldn’t be surprised to hear that we open our wallets wider in December more than in any other month. Your business does the same thing. There are times when you just need to have more cash available. Will you have the funds to make a critical purchase in the month you planned?
Here’s a short article from Barclays’ website about the benefits of cash flow forecasting. With any type of forecasting, the main point is to use it to manage your business. Plan for growth, identify areas of concern, and ultimately – for decision making. It’d be a nice if we all had even, steady streams of revenue coming in and expenses going out. We’d know at a glance when we could reserve funds or go ahead with a major purchase. The real world isn’t like that. What if your parts shipment is delayed for weeks – or ruined – by an oil spill. How quickly could you adjust your forecast to gauge whether you could proceed with an acquisition? Would you need several hours or maybe even a few days to be confident that you’ve considered everything in order to make that decision? How does 5 minutes sound? Yes, really. This isn’t the kind of work that Excel does best. Think about other possibilities and what you’d like to happen to get you to that decision point. The parts shipment is ruined and you have to go with another supplier. Naturally with the short turn around needed, you’ll pay a premium. The cost is now $500 each so you adjust that cost in your budgeting software. That new amount automatically changes your inventory value and your payables owed. Your balance sheet projection changes to convey the exact new amounts along with revising the totals and equity properly. You know that you might need to tighten the profit margin on the product price in order to absorb some of the additional expense. It’s tough to do while still remaining competitive but you need to take a look at it. You adjust the profit margin percentage.
Your income statement instantly adjusts to reflect the new revenue and expense amounts in the appropriate periods. That’s it. Check your cash flow projection and it’s automatically been adjusted to account for the new payables amount. The change in revenue and inventory value adjusted, again automatically, over the subsequent months where you’ve projected the sales of your products. It’s accurate since its using the inventory valuation method that you specified when you set up your budget. You’ve already plotted the acquisition into your budget plan so it’s a matter of reviewing the cash flow forecast report to determine if you can stay on course or if you need to take additional actions. Wouldn’t that be nice? You’ve changed two figures. You could have just changed the part cost and checked the reports at that point to see how it’d play out if you don’t make the price adjustment. You still can, just adjust the margin back and you immediately see that scenario. Accurately. No linked spreadsheets to worry about. No concerns that any formula cell is bad or needs to be edited. None. That would be the benefit of using a next generation solution for automated budgeting and forecasting. Take a moment now to think through all the steps you would need to complete to get to that revised cash flow forecast using the budgeting method you have in place today. The comparison is staggering, isn’t it?