Having a solid grip on your cash flow forecast and reporting is one of the most important factors for any business to track. And given the current climate, paying attention to cash flow has become even more vital 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.
However, there are many companies that are still not getting 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.
In this article, I want to share with you 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 even improve the overall process, giving you more accurate data over the long run.
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. While for some businesses, say Christmas tree farms or swimming pool installers in New England, typically have that seasonality baked into the cake, many others can still experience this to a lesser extent.
You can start by investigating reporting from previous years to determine if your business does have 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 your expenditures for any low period. And, it can also help create contingency plans for any potential issues that might arise.
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 can 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 as well. These would include tax payments as well as 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.
Deliver Accurate Cash Flow Forecasts
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Plan Out Scenarios
While no CFO or budget manager wants to think about the worst, 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 as well. Being effective at cash flow forecasting means doing what you can to mitigate uncertainty over the long run, that’s where planning out multiple scenarios can come into play.
An easy way for you to approach this is to take your current sales forecast and then project the numbers with 10% more sales and 10% fewer sales. This won’t be a catch all for every variable, but it can be a very good place to start in helping you get a handle on any potential cash flow issues if your original projections aren’t met.
Hopefully, these three tips will help you untangle the sometimes complex world of cash flow forecasting.
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