Cash flow secrets: why forecasting monthly is vital, and how to improve its accuracy

I know few CFOs who take the time to forecast the cash flow more than once a quarter, but in my book that’s a mistake. Cash flow forecasts are critical tools for monitoring the health of a company, and should be done monthly.

by Ed Gromann, CPO, Centage Corporation

Here’s why: Cash flow forecasts tell you whether or not you will have enough cash to fund the priorities the executive team and Board have set for the year. Let’s say your Board has set a top-level goal to grow revenue by 20% in 2019, and to meet that expectation, they have authorized the VP of Sales to expand the sales team. It will undoubtedly take time for those new sales representatives to get up to speed on the products you sell, and to make contacts with potential customers. In the meantime, the company will need to pay their salaries and benefits, which takes cash. It’s better to know as soon as possible whether you will have enough on hand in the coming months, so that you can take steps to address it before it becomes a problem.

Many CFOs tell me that one of the key reasons they don’t forecast their cash flow more often is because it’s hard to do, and the forecasts are often inaccurate. Cash flow forecasts are often inaccurate, but this is usually for predictable reasons. Using the predictability of those inaccuracies, you can take the necessary steps to ensure the highest level of accuracy possible.

Inadequate resources will almost always guarantee that your cash flow forecasts will be inaccurate. Accurate forecasting requires robust data along with the proper tools and resources to both manage and monitor it. A spreadsheet won’t allow you to draw data instantaneously from accounts in order to provide an accurate picture of where the company stands. Personnel resources are another concern. Employees may not have the time for accurate data collection and analysis. Taking the time to standardize cash flow forecasting will make the whole process less arduous and time-consuming.

Another issue could be the lack of communication between business segments. If each department has its own system for collecting and predicting cash flow, each may produce a slightly (or wholly!) different outcome. Investing time in developing criteria will go a long way in eliminating discrepancies.

Finally, most companies lack a standardized system or methodology to forecasting revenue or for collecting and reporting on required data. You may find it well worth your time to appoint a specific group of people who are charged with developing and implementing this system company-wide.

Once you get these ducks in order, you’ll find that you’re able to more accurately forecast cash flow levels and — more importantly — predict if the company runs the risk of running out of cash. An easy way to assess that risk is to perform some simple scenario planning, such as looking at your current sales forecast, and then projecting the numbers with 10% more sales and 10% fewer sales.

The sooner you uncover the scenarios under which you could potentially run low, the easier it will be to devise a strategy. For instance, you can look at fixed and variable costs and see if you can renegotiate a contract or opt for a lower-cost service. Many of your vendors will be open to making alternative arrangements, especially if you are a valued customer.

Another option for service-based companies is to offer a pre-paid product. This strategy allows the company to obtain cash upfront, which also happens to be the time when they typically incur all of the expenses of onboarding a customer.

Of course, all of this depends on using a tool that automates how cash flows through your business, which is another reason why spreadsheets are unsuitable for the task at hand. And yet, migrating away from spreadsheets may be the most stubborn challenge of all. According to 2018 Benchmarking the Accounting & Finance Function report, 63% of executives surveyed said that Excel is their primary budgeting and planning tool. To be sure, this is better than the 80% of just a few years ago, but it also means that well over half of financial teams aren’t forecasting their cash flow as often as they should.


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