The last thing anyone wants is an out-of-control budget that could lead to a liquidity crisis. Fortunately, most companies don’t have to go through something like this. When interest rates and stock indexes drop from the global crisis, it may seem counterintuitive to have a strong sense of financial security.
Cash flow forecasting is planning that shows how much money the company expects to receive and payout over a given period is known as cash flow forecasting.
A cash flow forecast seems common sense based on the definition provided above, but why are businesses struggling to do it efficiently?
It’s worth noting that a cash flow budget consists of a series of components. In particular, a cash flow budget highlights the need for capital and the cost of goods, development costs, operating costs, and sales and revenue. Your cash flow projections are based on past performance data like any other quality budget. With this information, it is easier to predict the amount of money you’ll have coming in each month by looking at your projected sales for the upcoming year. Each month’s sales will be broken down into cash and credit sales.
Cash sales can be included in a company’s cash flow report in the same month they are made. There are no cash transactions with your credit card sales; instead, you have agreed-upon terms for your invoiced sales. As a result, you’ll need to examine your AR (accounts receivable) records and determine your typical collection period. Until 5 to 10 days after the end of the period, you will not be able to record your credit sales as cash.
Other sources of income are next. The revenue you receive from investments, the interest accrued on loans, and the liquidation of assets should be another essential line item to consider.
A business’s total revenue is the sum of its cash sales, receivables, and other sources of revenue (including interest). Critical items such as your sales, income, and any other receivables from your previous budget on your first month typically make up month 1 of your cash flow budget.
Yes, but are all businesses forecasting their cash flow the right way?
A reasonable estimate of your future cash outflows and inflows may seem obvious, but many companies never get around to doing it. In smaller and mid-sized businesses, this is especially the case.
The lack of cash flow forecasting models can be attributed to the following factors:
- Insufficient time has been allocated to it by the finance department’s management.
- Lack of Automated cash flow forecasting tools
Creating a good cash flow model is a difficult task. Because inaccurate models can lead to people not using them.
Aside from their primary responsibilities, executives are forced to deal with various interruptions and distractions, such as having no time or motivation to reassess project budgets during the year because the financial planning team has been exhausted by the annual budget process. A reliable cash flow is the lifeblood of all businesses.
How to Automate Cash Flow Forecasts
In the same way, technology can be used to automate many other tasks, accountants and finance teams can now rely on FP&A solutions to automate their cash flow forecasting.
Performance Canvas is a cloud FP&A software specializing in reporting, budgeting, forecasting, and consolidation. By using software like PCF, account managers can better plan their strategies, including scenario forecasting and driver-based forecasting.
Using driver-based forecasting means that assumptions are included that help automates and simplify the creation of forecasts related to sales, payroll, expenses, balance sheets, and cash flow.
Managers can use simulation models to make quick adjustments to their cash inflows and outflows to see how these changes affect their cash position, even if they do not have the time or resources to conduct a full forecast.
The majority of CEOs believe that improving the accuracy of cash flow forecasting brings numerous advantages. In times of chaos and volatility, it can help reduce the likelihood of encountering liquidity issues and help companies seize investment opportunities. Finding the right software not only improves your day-to-day processes but can simplify financial planning processes for your whole business.
PCF can help streamline your cash flow procedures and improve forecasting and analysis to help assess and prepare for the uncertain times ahead of your business.