Anyone running a business knows the way to run a business efficiently is by making sure the cash flow forecast is up to date.
Effective cash flow forecasting makes sure that you can anticipate different scenarios and prepare for them. Cash flow forecasting will also allow you to see the effect of your decisions on your business. For example, if you want to increase your employee benefits to improve talent retention, you can add that cost to your forecast to see its impact across the organization.
The problem for many organizations is that financial forecasting is a hit and miss game. Many finance departments struggle in coming up with realistic and fairly accurate forecasts due to a variety of reasons. Some say this is because of the manual nature of performing financial forecasting; others say it is because of the lack of a good process for forecasting balance sheet items or having a large, cumbersome model; others say it is because of the lack of reliable data; others think it is because of inherent errors in templates.
Now if you are an accountant tasked with cash flow forecasting, here are a few tips that might help you with cash flow forecasting for your organization.
- Do not forecast in detail far into the future
Most of the time, the devil is in the details. If you are working on four weeks plus nine, use items that can be anticipated for the first four weeks. For example, you can use receivables. As for the succeeding nine, use historical
- Input, output, sensitivity analysis, and variance analysis for each model should exist
Each of these items above serves a particular purpose which is why they should exist. For example, sensitivity analysis is good because it reveals to you the risks in your forecast.
Variance analysis is good because it will allow you to look at what you need to adjust to your company´s goals or strategies.
- Drive your inputs by metrics and look into subgroups of metrics
A good example of a driver for your input is debtor days, and for every metric, you use like debtor days, there are always further characterisations of it. Look into that and evaluate.
- Build your cash flow into accounts and tie into a P&L and balance sheet forecast
This practice is to attain improved transparency and interconnectedness in the process; otherwise, your cash flow forecast might feel disconnected or isolated.
- Make your forecast easily modifiable
A forecast that cannot be easily updated is a useless forecast. Everytime something happens – expected or unexpected, you should update your forecast so that it continues to reflect reality and so you can continue to use it as a basis for decision making.
- Record your variance reasons and review regularly
This should be done so you can test your assumptions and continue to make sure they are still relevant.
- Lock your figures or template
Not locking your template or your figures can lead to unintended consequences. Most of the time, when financial forecasting is done in Excel spreadsheets, it is hard to trace a single mistake such as when a formula drags across when it shouldn’t have. Locking it is a way to prevent errors.
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