Since cash flow impacts so many areas of the business—from budgeting to purchasing to bank costs—it’s a key function that needs to be taken seriously. Without an accurate cash flow forecast, risk and illiquidity increase, impacting the overall budget. This applies in both the short and long term.
You’ve likely experienced this as well. Many CFOs often cite their cash flow forecasting as an area that suffers from significant inaccuracies. An inaccurate cash flow forecast can be potentially damaging, but is all too common an experience.
So what’s the solution?
While there’s no ‘silver bullet’ to solve any and all cash flow forecasting pitfalls, there are a few common ‘culprits’ behind the problems. These appear again and again and often contribute to poor results.
That’s what I hope to highlight in this post. I want to share some common areas frequently associated with inaccurate forecasts. Pay attention to these and your organization can take some of the guesswork out of cash flow forecasting.
Data is king. However, it doesn’t matter how much data your business has coming in if you don’t have the proper tools and resources to both manage and monitor it.
If you’re still using tools like Excel to monitor your cash flow, that could likely be a big contributor to inaccuracies. Many organizations today use advanced budgeting and forecasting systems to draw data instantaneously from accounts to provide a more accurate picture.
Resources can also apply to people. Oftentimes, organizations find employees don’t have the time to devote to accurate data collection and analysis. As your organization creates more standard systems around cash flow forecasting (see below), more effective employee hours can be applied to it.
Lack of Communication
A business can’t be run with separate divisions anymore. There’s too much valuable data that can be gained by cooperating and collaborating between departments.
A common cause of poor cash flow accuracy can be traced to a lack of communication between business segments. Each department might have its own systems for collecting and predicting cash flow which can produce entirely different outcomes.
CFOs willing to open these channels of communication with other stakeholders will likely see better results. This can also help ensure every key decision maker feels like they can voice their concerns.
No Single Forecasting Methodology
Another issue that often arises with cash flow forecasting is there isn’t any one system or methodology around it within an organization. This doesn’t just apply to analysis—it can also apply to data collection and reporting.
Oftentimes, many organizations don’t have one person or department that wraps it’s arms around the process. This is something your business might want to consider.
As highlighted above, having different departments with different methodologies can overwhelm the process. And it can increase errors and risk over the long run. Have a group take the lead in cash flow forecasting and put a system in place to ensure future accuracy.
Cash flow forecasting is often something that many CFOs struggle with each year. An inaccurate forecast will often cause far more trouble than it’s worth.
Try to avoid this by considering where your organization might be falling short. Addressing some of these common problems can improve your forecast accuracy and make the entire process run more smoothly.
Businesses of every description rely on the Budget Maestro™ family of software solutions by Centage Corporation to improve the efficiency and effectiveness of their business budgeting and planning, financial forecasting, financial consolidation and reporting processes. For more information, take a tour of Budget Maestro, contact Centage, or call 800-366-5111 now.