You realize how important it is to forecast your cash flow. Should you stop there?
With many companies transitioning from spreadsheet budgeting to purpose designed FP&A (Financial, Planning and Analysis) software applications, finance professionals and managers, and certainly senior managements realize how important it is to be able to forecast their company’s cash flow, or in other words, what cash balances are going to be available in each accounting period along the budget timeline, as driven by the revenue and expense forecasts for the same budget periods.
This is a major improvement in the budget process which starts with planning and culminates in a complete corporate budget compiled from individual budgets prepared and submitted by the organization’s business units. Forecasting the cash position of the company can answer many questions, some of which are:
- Will the company be able to commit to inventory purchases to meet forecasted sales demand?
- Will the company be able to maintain its workforce according to plan?
- Will the company be able to service its existing debt?
- Will the company be able to acquire additional assets needed to meet production goals according to plan?
- Will the company be able to fund any additional expansion required to meet planned growth?
- Will any new borrowings be needed?
- Do certain assets have to be sold?
- Will new equity financing be required?
All these fundamental questions can be intelligently answered if you are able to forecast the company’s cash flow. This must be done using the company’s budget and any additional budget versions or what-if scenarios.
Some purpose designed FP&A software solutions can accomplish that, especially if they are designed to produce a forecasted Balance Sheet and Statement of Cash Flows which are synchronized to the forecasted Income Statement and the underlying budget.
However, just forecasting the cash balance at the end of each budget period isn’t sufficient since it does not reveal the entire forecasted future financial health of the organization.
Finance department managers understand that periodically calculating key financial ratios reveals the financial health of their organization, especially when compared to past results of these same calculations and watching the changes in these values over longer periods of time. Comparing to similar companies’ results is also helpful.
The same idea applies to forecasted financial ratios, as the results of these calculations can clearly show what direction the financial health of the company is headed in, and how this correlates to the plan and budget.
When you know what financial ratios should look like, based on past performance and planned results, you can calculate forecasted (future) values of these financial ratios, using the various budget versions, and determine whether or not the future (forecasted) financial health of the organization is acceptable, following guidance and planning, and whether the plan and resultant budget should be adjusted.
Of course, this cannot be accomplished by using spreadsheet-based budgets and even not by some of the popular FP&A or CPM (Corporate Performance Management) software. To do that you need a solution that outputs a forecasted Balance Sheet and Statement of Cash Flows in addition to a forecasted Income Statement.
You also need a solution that will automatically produce an updated set of the above-mentioned financial statements for every version of the budget, every what-if scenario and every time you make even the slightest modification to any of the budget versions. All these forecasted financial statements must be synchronized to one another, just like your actual accounting financial statements.
Forecasting cash flow is a step in the right direction, but completely and accurately forecasting your balance sheet for each budget period will give you the ultimate tool to forecast the future financial health of the company.
See how you can automate your forecasting processes, forecast the impact of multiple scenarios, and quickly identify where, when and why actuals differ from plan, so you can take appropriate action:
Centage Corporation’s Planning Maestro is a cloud-native planning & analytics platform that delivers year-round financial intelligence. With Planning Maestro, Centage offers the sophisticated features needed by small and mid-market organizations to integrate budgeting, forecasting, and deep data analysis within one easy-to-use, scalable SaaS solution. For more information on how to modernize your office of finance with intelligent planning, view our product demonstration video, or call 800-366-5111.